Basic Accounting and Financial Management

BASIC ACCOUNTING AND FINANCIAL MANAGEMENT
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Contents
ABOUT THE AUTHOR ............................................................................................................. 5
PREFACE .................................................................................................................................. 5
ACKNOWLEDGMENTS ............................................................................................................ 6
DEDICATION ............................................................................................................................ 8
UNIT1: ACCOUNTING CYCLE.............................................................................................. 9
CHAPTER 1: INTRODUCTION TO ACCOUNTING ............................................................... 9
1.0 WHAT IS ACCOUNTING? .......................................................................................... 10
1.1 WHO ARE THE USERS OF ACCOUNTING INFORMATION? ............................... 12
1.2 BRANCHES OF ACCOUNTING ................................................................................. 15
1.3 WHAT IS THE PURPOSE OF ACCOUNTING? ........................................................ 16
1.4 QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS
INFORMATION .................................................................................................................. 18
1.4.1 Relevance ................................................................................................................ 19
1.4.2 Reliability................................................................................................................ 19
1.4.3 Comparability.......................................................................................................... 19
1.4.4 Understandability .................................................................................................... 19
1.4.5 Timeliness ............................................................................................................... 19
1.5 FINANCIAL STATEMENTS REQUIRED BY IAS 1 ............................................... 20
1.5.1 Statement of financial position ............................................................................... 20
1.5.2 Statement of Comprehensive Income ..................................................................... 20
1.5.3 Statement of Cash Flow .......................................................................................... 20
1.5.4 Statement of Changes in Equity .............................................................................. 20
1.5.6 Notes to accounting policies and other explanatory materials ................................ 20
1.6 DESCRIPTION OF ELEMENTS IN THE FINANCIAL STATEMENTS ................... 21
1.6.1 Assets ...................................................................................................................... 21
1.6.2 Liabilities ................................................................................................................ 22
1.6.3 Equity ...................................................................................................................... 22
1.6.4 Accounting Equation .............................................................................................. 23
1.6.5 Income..................................................................................................................... 23
1.6.6 Expenses ................................................................................................................. 23
1.6.7 Operating Activities ................................................................................................ 23
1.6.8 Investment Activities .............................................................................................. 23
1.6.9 Financing Activities ............................................................................................. 23
1.6.10 Recognition of Elements of financial Statement ................................................ 23
1.6.11 Measurement of Elements in Financial Statement................................................ 24
1.7 ACCOUNTING POSTULATES ................................................................................... 24
1.7.1 Accrual basis of accounting .................................................................................. 24
1.7.2 Going Concern ...................................................................................................... 24
1.7.3 Consistency Concept ............................................................................................ 24
1.7.4 Prudence Concept ................................................................................................. 24
1.8 ACCOUNTING STANDARDS .................................................................................... 26
1.9 BASIC ACCOUNTING CONVENTIONS/PRINCIPLES ............................................ 26
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1.9.1 Objectivity (independent valuation)........................................................................ 26
1.9.2 Substance over form ............................................................................................... 26
1.9.3 Materiality ............................................................................................................... 26
1.9.4 Business entity ........................................................................................................ 27
1.9.5 Money measurement ............................................................................................... 27
1.9.6 Historical cost ......................................................................................................... 27
1.9.7 Dual aspect .............................................................................................................. 27
1.9.8 Stability of Money................................................................................................... 27
1.10 LIMITATIONS OF FINANCIAL ACCOUNTING .................................................... 28
1.11 PRACTICE QUESTIONS ........................................................................................... 30
CHAPTER 2: THE ACCOUNTING EQUATION .................................................................... 32
2.0 ACCOUNTING AS A COMMUNICATION PROCESS ............................................. 32
2.1 THE ACCOUNTING EQUATION ............................................................................... 32
2.2 BALANCE SHEET GLOSSARY ................................................................................. 33
2.3 THE BALANCE SHEET FORMAT ............................................................................. 35
2.4 THE EFFECTS OF FINANCIAL TRANSACTIONS ON THE BALANCE SHEET.. 36
2.5 PRACTICE QUESTIONS ............................................................................................. 44
UNIT 2: COMPLETING THE ACCOUNTING CYCLE ....................................................... 48
CHAPTER 3: THE DOUBLE ENTRY SYSTEM ...................................................................... 48
3.0 THE DOUBLE ENTRY SYSTEM................................................................................ 48
3.1 THE BENEFITS OF THE DOUBLE ENTRY SYSTEM ............................................. 48
3.2 THE TEN BASIC RULES FOR DOUBLE ENTRY .................................................... 49
3.3 CLASSIFICATION OF ACCOUNTS ........................................................................... 52
3.4 AN ILLUSTRATIVE EXAMPLE ................................................................................. 55
3.5 BALANCING OFF THE BOOKS ................................................................................ 59
3.5.1 How to balance an account ..................................................................................... 59
3.6 THREE COLUMN ACCOUNT .................................................................................... 61
3.7 THE TRIAL BALANCE ............................................................................................... 64
3.8 PREPARATION OF THETRIAL BALANCE .............................................................. 65
CHAPTER 4: THE INCOME STATEMENT ............................................................................ 70
4.0 INCOME STATEMENT GLOSSARY ......................................................................... 70
4.1 IMPORTANCE OF THE INCOME STATEMENT ..................................................... 71
4.2 THE FORMAT FOR THE TRADING ACCOUNT ..................................................... 71
4.3 THE FORMAT FOR THE PROFIT AND LOSS ACCOUNT ..................................... 72
4.4 PUTTING IT ALL TOGETHER ................................................................................... 73
4.5 AN ILLUSTRATIVE EXAMPLE ................................................................................. 82
UNIT 3: NON-CURRENT ASSETS...86
CHAPTER 5: NON CURRENT ASSETS ................................................................................. 86
5.0 DESCRIPTION OF NON-CURRENT ASSETS .......................................................... 86
5.1 NON-CURRENT ASSET REGISTER.......................................................................... 87
5.2 RECOGNITION AND INITIAL MEASUREMENT OF NON-CURRENT ASSET ... 87
5.2.1 RECOGNITION OF NON-CURRENT ASSETS .................................................. 88
5.2.2 INITIAL MEASUREMENT OF NON-CURRENT ASSETS................................ 88
5.2.3 MEASUREMENT SUBSEQUENT TO INITIAL RECOGNITION ..................... 90
5.3 DEPRECIATION OF NON-CURRENT ASSETS ....................................................... 91
5.4 METHODS OF DEPRECIATION ................................................................................ 91
5.5 ACCOUNTING FOR DEPRECIATION ...................................................................... 94
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5.6 RECOVERABILITY OF THE CARRYING AMOUNT .............................................. 95
5.7 DERECOGNITION (RETIREMENTS AND DISPOSALS) ........................................ 95
5.8 DISCLOSURE ............................................................................................................... 95
5.6 PRACTISE QUESTIONS.............................................................................................. 99
UNIT 4 PARTNERSHIP...101
CHAPTER 6: INTRODUCTION TO PARTNERSHIP........................................................... 103
6.0 THE NATURE OF A PARTNERSHIP ....................................................................... 104
6.1 PARTNERSHIP AGREEMENTS ............................................................................... 105
6.2 ACCOUNTING ASPECTS OF PARTNERSHIP ....................................................... 106
UNIT 5: LIMITED COMPANIES 108
CHAPTER 7: ACCOUNTING FOR LIMITED COMPANIES............................................... 110
7.0 INTRODUCTION........................................................................................................ 111
7.1 PUBLIC AND PRIVATE LIMITED LIABILITY COMPANIES .............................. 115
7.2 DISTINCTIVE ACCOUNTING FEATURES ............................................................ 116
7.3 GLOSSARY OF LIMITED COMPANIES. ................................................................ 117
7.3.1 Types of Companies.............................................................................................. 117
7.3.2 TYPES OF SHARES ............................................................................................ 118
7.3.3 TYPES OF PREFERENCE SHARES .................................................................. 120
7.3.4 SHARE CAPITAL TERMINOLOGY.................................................................. 121
7.3.5: BONUS SHARES ............................................................................................... 122
7.3.6 DEBENTURES JARGONS ................................................................................. 122
7.4 FINANCIAL STATEMENTS OF LIMITED LIABILITY COMPANIES .................. 123
7.4.0 Objective of IAS 1 ................................................................................................ 123
7.4.1 Scope of IAS 1 ...................................................................................................... 123
7.4.2 Objective of financial statements .......................................................................... 124
7.4.3 Components of financial statements ..................................................................... 124
7.4.4 Fair presentation and compliance with IFRSs ...................................................... 124
7.4.5 Statement of Financial Position (Balance Sheet) .................................................. 126
7.4.6 Statement of Comprehensive Income ................................................................... 127
7.4.7 Statement of Cash Flows ...................................................................................... 130
7.4.8 Statement of Changes in Equity ............................................................................ 130
7.4.9 Notes to the financial statements .......................................................................... 130
7.4.10 Other disclosures ................................................................................................. 132
UNIT 6 CASHFLOW STATEMENT 139
CHAPTER 8: CASH FLOW STATEMENT ............................................................................ 142
8.1 INTRODUTION .......................................................................................................... 142
8.2 PRESENTATION OF THE STATEMENT OF CASH FLOWS ................................ 144
8.2.1 THE DIRECT METHOD ..................................................................................... 145
8.2.2 THE INDIRECT METHOD ................................................................................. 146
8.2.3 CALCULATION OF INTEREST/DIVIDEND/TAX PAID: ............................... 147
8.2.4 CALCULATION OF INTEREST/DIVIDEND/TAX RECIEVED ...................... 148
8.2.5 PURCHASE, PROCEEDS AND PROFIT/LOSS ON DISPOSAL OF NON-
CURRENT ASSETS ..................................................................................................... 148
8.3 WORKED EXAMPLE ................................................................................................ 149
9.0 ASSIGNMENTS................................................................................................................ 157
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ABOUT THE AUTHOR
Dr. Kingsley Opoku Appiah (hereafter K.O.) is a lecturer of Accounting at the
Kwame Nkrumah University of Science and Technology. His teaching effort focused
on the Bachelor of Science in Administration (BSc.) and Master in Business
Administration programmes. As the facilitator of Accounting for Managers course,
He continues to introduce significant innovations, which in turn, has made the
course the most visible among all the courses at the Masters level. For this reason,
K.O is credited for shaping the Accounting for Managers course.
Previously, K.O. lectured at the University of Ghana Business School on the

Bachelor of Science in Administration (BSc.) programme from 2000-2001, as a
Teaching Assistant. K.O. was, subsequently recruited by Sambus Company Limited
and Unicorn Ink Limited after his national service, where he worked under Professor
Joshua Abor as Assistant Accountant in 2001 and Assistant Group Finance Officer
in 2002, respectively. He was accredited with shaping the risk and internal control
systems, and for the introduction of budget and budgetary control in the Unicorn
Group, which he designed and sustained till 2002 when he left to the UK to pursue
his professional accountancy qualification (ACCA) and masters degree (MSc in
Accounting with Finance) at London College of Accountancy and London South
Bank University, respectively.
Prior to his doctoral degree from Loughborough University K.O was the Chief
Examiner in Accounting for the University of Management Studies Bachelor of
Science in administration programme, and taught Cost Accounting and Intermediate
Accounting on part-time basis at the Christian Service University College in
Kumasi. As well, K.O was on the verge of producing textbooks for students in
accounting when in September 2007 he was appointed as External Examiner for
Ghana Baptist University College and a consultant for Christ Apostolic University
College, after successfully defending the cause for both its accreditation and
affiliation with Kwame Nkrumah University of Science and Technology.
K.O is also a member of both the Association of Certified Chartered Accountants

(ACCA) and Institute of Chartered Accountants, and serves as moderator of
examination questions for the latter. He also works as auditor on part-time basis at
Owusu-Afriyie and Associates, Kumasi. Finally, He has published extensively in
top-tier journals including Journal of Benchmarking, where his paper is regarded as
one of the best articles since 2009. K.O has taught professional accountancy related
courses for over 5years in the UK, first in Jeff Woller College, then at Boston
College of London and Hamilton College. He has also taught financial accounting,
financial reporting and financial management at both BSc and MSc levels in
Loughborough University. When not writing books and/or studying, K.O plays with
his two daughters: Abena Opoku Appiah (Naana Pokua) and Akosua Nyarko Appiah
(Maame Nyarko).
PREFACE
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This book echoes McKinsey (1929) notion that The teaching of accounting is no longer
designed to train professional accountants only. With the growing complexity of business and
the constantly increasing difficulty of the problems of management, it has become essential
that everyone who aspires to a position of responsibility should have knowledge of the
fundamental principles of accounting. Put differently, this Accounting book provides a very
accessible and easy-to-follow introduction to six main aspects of accounting. Intended as a
core textbook for students studying accounting for the first time, especially candidates
pursing Actuarial Science at Kwame Nkrumah University of Science and Technology
authored by a seasoned Lecturer in Accounting with more than 10 years of experience in the
teaching of accounting, this book has benefited immensely from the authors rich knowledge-
base and background either as moderator of ICAG examination questions or Auditor for the
past 10 years.
ACKNOWLEDGMENTS
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As I express our gratitude, I must never forget that the highest appreciation is not to
utter words, but to live by them by John F. Kennedy
I wish to acknowledge a number of individuals whom I owe a debt of a significant magnitude,

although I take full responsibilities for this material. Special thanks go to Mrs Ophelia Opoku
Appiah (my love and wife) and my two daughters (Abena Opoku Appiah and Akosua Nyarko
Appiah), who delivered the moral support needed and lavish their love on me during the
write-up of this material, despite my constraints to demonstrate my ardent affection as a
husband and father, respectively. I also express my profound gratitude to Miss Beatrice Osei
for her support and sacrifice made that made this work a reality. I say a big thank you and
pray for Gods blessing and long life for you and your family.
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DEDICATION
First to my mentors:
1. The late Professor Kwasi Andam, Sir, you gave me the opportunity to be a lecturer. I
wish you were alive to see my progress, RIP.
2. The late Mr. Kwadwo Baah Wiredu, Sir, you are an inspiring Chartered Accountant.
My prayer is to follow your footsteps, RIP.
3. The late Nelson Mandela, Mandibas selfless and perseverance attributes remain tall
in his long walk to freedom, RIP.
Second, people who have made my life comfortable

1. My Father, Moses Appiah Mireku
2. My Mother, Paulina Osei
3. My wife, Ophelia Opoku Appiah (Maafia)
4. My daughters: Abena Opoku Appiah (Naana Pokua) & Akosua Nyarko Appiah
(Maame Nyarko)
5. All my pastors and teachers, including lecturers, in Ghana, United Kingdom and
elsewhere
6. All my colleagues
7. And finally, my past students in Ghana (i.e. University of Ghana, Kwame Nkrumah
University of Science and Technology, Christian Service University College,
University College of Management Studies) and United Kingdom (Loughborough
University, Hamilton College, Boston College of London, Jeff Wooller College,
London)
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UNIT1: ACCOUNTING CYCLE
SCOPE
This unit is structured into three main chapters. These are:
CHAPTER 1 Introduction to Accounting
CHAPTER 2: Accounting equation
CHAPTER 1: INTRODUCTION TO
ACCOUNTING
One way to cheat death is to become an accountant, it seems,. The Norfolk
accountancy firm W.R. Kewley announces on its website that it was originally
established in 1982 with 2 partners, one of whom died in 1993. After a short
break he re-established in 1997, offering a personal service throughout. He was,
Feedback presumes, dead only for tax purposes.
(Source: New Scientist, 1 April 2000, p.96-quoted in Jones, 2006)
SCOPE: This chapter considers the following:

What is Accounting
Types of Accounting
Purpose of Accounting
Qualitative Characteristics
Types of Accounting
Users of Accounting
Elements of Financial Statements
Accounting Postulates
Accounting Standards
Basic Accounting Conventions
Limitations of Accounting
Practice Questions
AIMS:
To outline the objectives and requirements of the course.
To attempt the questions: What is accounting? Who is it for? And What is its purpose?
INTENDED LEARNING OBJECTIVES

After studying this chapter candidates should be able to:
Define financial, cost and management accounting
The main users of accounting information
State and discuss some of the key questions concerning the nature of accounting and
its purposes (objectives).
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1.0 WHAT IS ACCOUNTING?
Committee on Terminology of the American Institute of Certified Public Accountants (1953)
defines Accounting as the art of recording, classifying and summarizing, in a significant
manner and in terms of money, transactions and events which are, in part at least, of a
financial character, and interpreting the results thereof. This indicates that accounting
considers monetary values, interpretational aspects (high on accountants work). This said,
the recording aspects remain low on accountants work hence preserve of bookkeepers). This
definition is endorsed by American Accounting Association (1966), emphasizing that
accounting is the process of identifying, measuring, and communicating economic
information to permit informed judgments and decisions by users of the information. Figure
1 presents the four main stages namely: recording, classifying, summarising and
communication, of the accounting information system.
FIGURE 1: ACCOUNTING INFORMATION SYSTEM
(Source: Frank Woode and Sheila Robinson, 2013)
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The definition highlights that accounting:
provides economic information to others, implying it relates to the financial or
economic transactions of the business.
information needs to be identified and measured. This is done by way of a "set of
accounts", based on a system of accounting known as double-entry bookkeeping.
The accounting system identifies and records "accounting transactions".
"measurement" is not a straight-forward process. It involves making judgements
about the value of assets owned by a business or liabilities owed by a business. It is
also about accurately measuring how much profit or loss has been made by a business
in an accounting period. The measurement of accounting information, however, often
requires subjective judgement to come to a conclusion, details of this sentence
follows in the relevant topic.
In addition, the definition identifies the need for accounting information to be

communicated. The way in which this communication is achieved may vary. There are
several forms of accounting communication reports including annual report and accounts,
management accounting reports. The communication need is about understanding who needs
the accounting information, and what they need to know! Accounting information is
communicated using "financial statements".
Figure 1 shows that Accounting is an information system that record, classify, summarise and
communicate financial transactions of a business to diverse stakeholders. These stakeholders,
in turn, use the accounting information to assess the financial performance and position as
well as movement in liquidity of a business. The Australian Accounting Research
Foundations Statement of Accounting Concepts (SAC) No. 2 confirms this notion,
highlighting that accounting reports provide relevant and reliable information, which is
primarily financial in nature, about economic entities and designed to assist various user
groups to make and evaluate economic decisions relating to allocation of scarce resources. In
short, accounting is the language of the business.
ACTIVITY 1.0 THE ACCOUNTING CYCLE

Outline the accounting cycle.
The accounting cycle is a series of steps performed during each accounting period to classify,
record, and summarize data for a business and to produce the needed financial information.
The eight steps of the accounting cycle describe the accounting for an economic transaction
from the time it occurs until it is ultimately reflected in the financial statement.
8. CLOSING 1. TRANSACTION OCCURS

Books are prepared for
next cycle
2. JOURNALISNG
7. DRAFT FINANCIAL STATEMENTS Transaction are entered
Balance Sheet, Income Statement and in a general journal
Cash Flow Statement is prepared
3. POSITIONING
6.CLOSING ENTRIES Journal entries are
Clear and close revenue and expense transferred to ledger
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accounts, transfer to statements

5. ACCOUNTING 4. TRIAL BALANCE
ADJUSTMENTS Accounts are verified,
Adjustments are made in totalled and balanced
order to prepare fin. statement
This is the sequence of steps in accounting for a financial transaction entered into by an
organisation.
The eight steps of the accounting cycle describe the accounting for a business transaction
from time it occurs until it is ultimately reflected in the financial statement.
The steps are;
Transaction occurs (source documents)

Journalising: Transactions are entered in a journal.
Posting: Journal postings are transferred to the ledger account
Trial balance: Accounts are verified, totaled and balance.
Accounting adjustments: Adjustments are made in order to prepare the financial
statement.
Closing entries: Clear and close revenue and expense, transfer to the profit and loss
account (Income statement account)
Draft financial statement: Balance sheet, Profit and loss account (Income statement
account) and cash flow statement.
Books are prepared for the next cycle.
(source: adopted from Appiah-Kubi unpublished lecture material)
1.1 WHO ARE THE USERS OF

ACCOUNTING INFORMATION?
A good accounting system must be designed systematically as follows:
1. identify both internal and external users,
2. evaluate user information needs,
3. design the accounting system to meet users needs,
4. record financial data about business activities and events,
5. prepare accounting reports for users.
To conserve space we discuss point 1 and 2.
1. Identify both internal and external users

Internal users of accounting reports are directly involved in managing and operating the
business. They include managers and employees. Management accounting or managerial
accounting is a branch of accounting that provides internal users with information required
for decision making. This type of information is sensitive in nature and may include
information on budget and budgetary control for the business.
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External users of accounting reports, however, are not directly involved in managing and
operating the business. They include but not limited to customers, creditors, general public,
competitors, and government. Financial accounting is a branch of accounting that provides
external users with information required for decision making. This type of information is
general in nature and thus, enclosed in the general-purpose financial statement.
Alternatively, the users of accounting information may be classified into direct and indirect.
Direct users include: the owners of a corporation and its shareholders, creditors and
suppliers, the firms management, the firms workers, taxing authorities and customers.
Indirect users also include: financial analysts and advisers, stock exchanges, lawyers,
regulatory or registration authorities, the financial press and reporting agencies, trade
associations, labour unions, competitors, the general public, and other government
departments. FIGURE 2 shows the Accounting Information Users. This paves the way for a
discussion of their likely decision and their information needs.
FIGURE 2: Accounting information Users
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(Source: Mclaney and Atril, 2012)
2. Evaluate user information needs

For brevity I present the evaluation of users information needs in table 1.
Table 1 shows the Accounting Information Users, likely decision and their information
needs.
USER INFORMATION NEEDS
/LIKELY DECISIONS
/ACCOUNTING REPORTS
INTERNAL USERS
1. Managers Information for planning, decision making and control
/whether to close down an unprofitable unit
/various reports including specialist reports.
2. Employees Information about job security and for collective
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bargaining
/To assess managements ability to pay wages and
salaries
/Profit and loss account.
EXTERNAL USERS
Potential Shareholders Information for buying and selling shares
and Shareholders /make voting decisions at AGM
/Annual report
Lenders Information about assets and the companys cash position
/ To assess managements ability to pay debts
/Profit and loss account
Suppliers and other Liquidity: information about assets and the companys
creditors cash position
/is the company solvent
/statement of financial position.
Customers Going concern: Information about the long-term
prospects and survival of the business
/How long the company would allow them credit
/Balance sheet, Profit and loss account.
Government and agencies Profitability& Information to enable governmental
planning. Information primarily on profits to use as a
basis for calculating tax
/what is the tax liability of the company
Public Profitability& Information about the social and
environment impact of corporate activities
/what is the companys impart in the society
ACTIVITY 1.1: USER OF ACCOUNTING REPORTING

Identify the main users of accounting information for a university. Do these users,
or the way in which they use accounting information, differ very much from the
users of accounting information for private-sector businesses?
ACTIVITY 1.2: CONFLICTING INTERESTS OF USER GROUP

Can you think of an example where the interests of users might actually
conflicts?
1.2 BRANCHES OF ACCOUNTING

Figure 3 displays the types or branches of accounting. The branches include financial
accounting, management accounting, cost accounting, treasury management, auditing,
taxation, and consultancy. This said, I restrict my discussion to the first three at this stage of
the module.
FIGURE 3: Branches of Accounting
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Financial accounting considers preparation and communication of financial information
mainly to the external users. Similarly, management accounting focuses on financial and non-
financial information for the internal use of management. Finally, cost accounting deals with
collation of data for inventory valuation. To conserve space table 2 presents a brief overview
of financial accounting and management accounting.
Table 2 Financial and Management Accounting

Financial Management
Accounting Accounting
Nature General purpose Specific purpose
Details Aggregate figures Detailed information
Restrictions Highly regulated Not regulated-as prescribe by
management
Reporting Period Annual/Semi-annual Monthly/Weekly/Daily
Time Horizon Backward looking Forward looking
Information Primarily monetary items Monetary and non-monetary information
measured on an objective greater reliance on subjective information
basis
Examples of reports Financial Statements Budget and Budgetary Control Reports
1.3 WHAT IS THE PURPOSE OF

ACCOUNTING?
Accounting information may help management and other stakeholders to:
determine how much resources are available at any particular time
identify where money comes from and where money goes.
assess the financial performance of the business
assess the financial position of the business
benchmark companies, employees and business units/products
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evaluate the performance of the CEO and his management team. Thus, a firm can
assess the effectiveness and efficiency of the CEO by using accounting
information.
satisfy demand of its Stewardship and or Accountability
Stewardship is a traditional approach of accounting that places an
obligation on stewards or agents, such as directors, to provide relevant and
reliable financial information relating to resources over which they have
control but which are owned by others, such as shareholders.
Shareholders who appoint managers to look after the resources will be
concerned to know what has happened to their resources. This echoes the
parable in St Matthews Gospel (Chapter 25) when the rich man went on a
journey and delivered his talents to his servants. On his return he
demanded accountability from his servants concerning the resources
entrusted in their custody. He rebuked the servant who had not profitably
used the resources he had managed in his masters absence. Today the
process whereby managers of business account to the owners of the
business is called stewardship accounting. The reporting and accounting is
usually done by means of financial statement.
satisfy demand of company law requirement and listing regulation

satisfy demand of Agency theory
supply useful information for making economic decisions set by the Conceptual
Framework.
The objective of financial statements is to provide information about the
financial position, performance and changes in financial position of an
enterprise that is useful to a wide range of users in making economic
decisions.
businesses and individuals to plan through budgeting
businesses and individuals to keep records of the economic transactions
In summary, the purpose of accounting is to provide useful information to assist managers in

operating the business. Further, accounting provides information to other users in assessing
the economic performance and condition of the business.
FIGURE 3: THE QUALITIES THAT INFLUENCE THE USEFULNESS OF

ACCOUNTING INFORMATION
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(source: Mclaney and Atril, 2012)
1.4 QUALITATIVE CHARACTERISTICS OF

FINANCIAL STATEMENTS INFORMATION
Figure 3 displays the qualities that influence the usefulness of accounting information, the
analysis of which I turn. The International Accounting Standards Board (IASB)s Conceptual
Framework prescribes qualitative characteristics that would enhance the usefulness of
financial information. These characteristics include fundamental and enhancing
characteristics. There are two main fundamental characteristics of financial statement
information, which relate to the content of the elements in the financial statement.
1. The fundamental characteristics are: i) relevance - to the needs of the users, to evaluate the
performance of the company and ii) reliability - complete, free from error or bias and
faithfully represent the substance of transactions so that it be can relied on.
2. There are also two main enhancing characteristics of financial statement information,
which relate to the presentation of the elements in the financial statement. These are
understandability- in a form that is understandable by user (clarity) and comparability-
consistent in form and method from one period to the next and also comparable with those of
other similar companies. I will discuss each in turn.
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1.4.1 Relevance
This infers that the information to be provided in the financial statements must be significant
to the needs of the stakeholders to enable them evaluate the financial statements to make their
useful economic decisions. Relevant information is that information which can influence
users in their economic decisions and thus, help stakeholders to evaluate past, present or
future events or confirming their existing evaluations. Relevant information thus must have
predictive value and confirmatory value. In sum, relevant information is that information
which has the ability to influence decisions of user groups.
1.4.2 Reliability
The information provided should be such that it can be relied on by external users. This
means that information should be complete, free from material errors and bias, and faithfully
represents what it purports to represent.
1.4.3 Comparability
Users of accounting information should be able to compare the financial statements of a
reporting entity from year to year in order to identify trends in its financial position and
performance. They should also be in a position to compare financial statements of different
business to evaluate their relative financial position, changes in financial position and
performance. To achieve comparability, there is the need for consistency in the use of
accounting policies across accounting periods.
1.4.4 Understandability
The financial information provided should be understandable by users. This assumes that
users have a reasonable knowledge of business and accounting. Understandability can be
enhanced by the aggregation and classification of financial information.
1.4.5 Timeliness
For financial statements to be useful to users, they should be published on time. Undue delay
in reporting information may result in loss of relevance.
SOUNDBITE 1.4: MATERIALITY THRESHOLD

* In addition to the possessing the characteristics mentioned above, accounting
information must also cross the threshold of materiality.
* Thus, its omission or misrepresentation in the accounting reports would really
alter the decisions that users make
ACTIVITY 1.4: COST VS BENEFITS

Suppose an item of information is capable of being provided. It is relevant to a
particular decision; it is also reliable, comparable, can be understood by the
decision maker concerned and is material.
Can you think of a reason why, in practice, you might choose not to produce the
information.
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1.5 FINANCIAL STATEMENTS REQUIRED
BY IAS 1
IAS 1.50 prescribes the structure and content of financial statements. The structure should
include the financial statements, the reporting enterprise, whether the statements are for the
enterprise or for a group, the date or period covered, the presentation currency, the level of
precision (thousands, millions, etc.). In addition, IAS 1 prescribes five main elements of
financial statements. These are statement of financial position, statement of financial
performance, statement of cash flows, statement of changes in equity and notes on accounting
policies and other explanatory materials. These are briefly discussed in turn.
1.5.1 Statement of financial position

This statement shows the financial position of an entity at a specific date. Specifically, it
presents the assets and claims (i.e. equity and liabilities) as at a specific date..
1.5.2 Statement of Comprehensive Income

It shows the financial performance of an entity within a given period, normally one
accounting period. Specifically, it presents the incomes and expenses within an accounting
period. If income exceeds expenses the difference is called profit. If income is less than
expenses the difference is called loss.
1.5.3 Statement of Cash Flow

This statement shows the movement in liquidity of an entity within a given period, normally
one accounting period. Specifically, it presents the cash inflows and cash outflows from
operating, investment and financing activities within an accounting period. It reconciles the
opening cash balance to the closing cash balance
1.5.4 Statement of Changes in Equity

Entities are required to show the changes in owners equity under the following thematic
areas: Share capital, Share premium, Revaluation reserves, Translation reserves and Retained
earnings
1.5.6 Notes to accounting policies and other explanatory

materials
The FASB statement states that: since recognition means depiction of an item in both words
and numbers, with the amount included in the totals of the financial statements, disclosure by
other means is not recognition. Disclosure of information about the items in financial
statements and their measures that may be provided by notes or parenthetically on the face of
financial statements, by supplementary information, or by other means of financial reporting
is not a substitute for recognition in financial statements for items that meet recognition
criteria
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REAL WORLD 1:
CONTENT OF ANNUAL REPORTS AND ACCOUNTS FOR GREGGS PLC 2011
Page
Directors report and business review Chairmans statement 4
Chief Executives report 7
Financial Review 11
Social Responsibility 17
Principal risks and uncertainties 26
Board of Directors 30
Governance 32
Audit Committee Report 36
Additional information 38
Directors Remuneration Report 40
Statement of Directors responsibilities 52
Independent auditors report 53
Accounts Consolidated income statement 57
Consolidated statement of comprehensive income 57
Balance sheets 58
Statements of changes in equity 59
Statements of cash flows 61
Notes to the consolidated accounts 63
1.6 DESCRIPTION OF ELEMENTS IN THE

FINANCIAL STATEMENTS
Once again the elements in the Statement of Financial position are assets, liabilities and
equity.
1.6.1 Assets
Assets are resources controlled by the entity as a result of past events, from which future
events are expected to flow to the firm. It represents potential to contribute, directly or
indirectly, to the flow of cash or cash equivalent to the enterprise. Physical form is not
essential to the establishment of existence of assets. Legal rights are not essential to the
establishment of existence of assets. Purchasing or producing is not always essential to obtain
assets. Expenditure incurred for seeking future economic benefit may not result in asset
21
SOUNDBITE 1.2: DECISION CHART FOR ASSETS
*
*
(Source: Mclaney and Atril, 2012)

1.6.2 Liabilities
Liabilities are present obligation of the enterprise, arising from past events, the settlement of
which is expected to results in outflow of resources embodying in economic benefit. Its a
present obligation to be settled in future. Obligations may be due to binding contract or
statutory requirement. A present obligation and a future commitment differ from each other.
Careful estimates are required to measure provisions.
1.6.3 Equity
Equity is the residual interest in the assets after deducting all its liabilities. It is dependent on
the measurement of assets and liabilities. A change in net assets results in a change in equity.
Net assets /net worth/ shareholders' equity = assets minus liabilities.
22
1.6.4 Accounting Equation
The relationship among assets , liabilities and equity can be expressed in the following
equation. Assets = Liabilities + owner s equity. The effect of all transactions is reflected in
this equation.
1.6.5 Income
It represents the increase in economic benefits in the form of increase in assets (debtors) or
decrease in liabilities (provisions for bad debts). Income is both revenue and gains. Revenue
arises from the ordinary course of the business. Gains may or may not arise from the ordinary
course of the business.
1.6.6 Expenses
It represents the decrease in economic benefits in the form of depletion or outflow of assets
(decrease in debtors not in the form of payment by cash or other) or increase in liabilities
(provisions for bad debts). Expense consists of expenses and losses. Expenses arise from the
ordinary course of the business. Losses may or may not arise from the ordinary course of the
business.
1.6.7 Operating Activities

Operating activities are the main revenue-producing activities of the entity that are not
investing or financing activities, so operating cash flows include cash received from
customers and cash paid to suppliers and employees [IAS 7.14].
1.6.8 Investment Activities

Investing activities are the acquisition and disposal of long-term assets and other investments
that are not considered to be cash equivalents [IAS 7.6].
1.6.9 Financing Activities

Financing activities are activities that alter the equity capital and borrowing structure of the
entity [IAS 7.6].
1.6.10 Recognition of Elements of financial Statement

Recognition is the process of formally recording or incorporating an item into the financial
statements of an entity as an asset, liability, revenue, expense, or the like[Including]
depiction of an item in both words and numbers, with the amount included in the totals of the
financial statements
For an element to be recorded in the financial statements both conditions stated below must
be satisfied.
1. It is probable that future economic benefit will flow to or from the
entity
2. The item can be measured reliably
23
1.6.11 Measurement of Elements in Financial Statement
The IASBs conceptual framework prescribes the following as basis of measurement for
elements in financial statement. These are: Historical cost, Current cost, Realisable value and
Present value. The historical cost is the most common basis of measurement of assets, due in
part to its reliability and verifiability.
1.7 ACCOUNTING POSTULATES

These are the fundamental assumptions underpinning financial statements. They include:
accrual concept, going concern, prudence concept and consistency, the analysis of which I
turn to.
1.7.1 Accrual basis of accounting

IAS 1 requires that an entity prepare its financial statements, except for cash flow
information, using the accrual basis of accounting. [IAS 1.27]. The effects of
transactions and other events are recognised when they occur and reported in the
financial statement of the period to which they relate
1.7.2 Going Concern

The enterprise will continue for a foreseeable future and have no intentions to
curtail or liquidate its activities materially. An entity preparing IFRS financial
statements is presumed to be a going concern. Thus, if management has
significant concerns about the entity's ability to continue as a going concern, the
uncertainties must be disclosed. If management concludes that the entity is not a
going concern, the financial statements should not be prepared on a going concern
basis, in which case IAS 1 requires a series of disclosures [IAS 1.25].
1.7.3 Consistency Concept
The presentation and classification of items in the financial statements shall be
retained from one period to the next unless a change is justified either by a change
in circumstances or a requirement of a new IFRS [IAS 1.45]. The accounting
policies are followed consistently from year to year. In short, there is consistency
of accounting treatment of like items within each accounting period and from one
period to the next.
1.7.4 Prudence Concept

Prudence: revenue and profits are not anticipated, but are recognised by inclusion
in the profit and loss account only when realised in the form either of cash or of
other assets. The ultimate cash realisation of which can be assessed with
reasonable certainty; provisions made for all known liabilities (expenses and
losses) whether the amount of these is known with certainty or is a best estimate in
the light of the information available. In short, It prescribes that the accountant
should anticipate losses but not gains. For example, accountant should opt for the
method that would have adverse impact on profit where judgement is involved.
24
SOUNDBITE 1.7: ASSUMPTIONS UNDERLYING FINANCIAL STATEMENTS
* In advent of the IASB Conceptual Framework, the consistency concept is captured
under comparability. In addition, prudence is captured under reliability. For these
reasons, the accrual and going concern concept are the two assumptions underpinning
the financial statements.
ACTIVITY1.7: DETERMINANTS OF A USEFUL INFORMATION

What are the major determinants of a useful accounting system?
Answer guide:
The provision of information that is useful in terms of meeting the needs of users
Presented in a timely manner
In a format that is appropriate
And understandable
ACTIVITY 1.8: CONFLICTING STANDARDS

Can you think of a scenario where the accounting postulates and/or conventions may conflict?
Answer guide:
Think of historical concept (says use the cost the assets), because it in line with the
objectivity and going concern concepts. Following from this, consistency concept says
the method adopted should be used consistently between accounting periods.
Prudence, however, may suggest that the use of the current cost may exhibit a
negative impact on profitability, and thus, the entity should elect the current costs.
ACTIVITY 1.9: ARE THESE ASSETS?

1) A domain name, such as myjoyonline.com
2) A brand name, such as KNUST or Asante Kotoko
3) Samuel Eto, Chelsea FC Striker
Note:
For it to be an asset there must be future economic benefit
But not all assets are recognised in the balance sheet only those which can be
reliably measured
If its not an asset, its a cost
ACTIVITY 1.10: ARE THESE LIABILITIES?

1) Money we owe to a creditor
2) A customer suing for damages because of faulty goods
3) A hopeless striker in a Premier Division team
Remember: Liabilities are obligations to transfer economic benefit
25
1.8 ACCOUNTING STANDARDS
Accounting standards contribute to the regulatory framework governing how limited
companies prepare information for external parties. The standards set down quite specific
formats and layouts for the presentation of accounts. For example, Accounting standards
prescribe the general conventions of accounting (say, the going concern or the matching
conventions). Most of the standards prescribe guidelines on a range of accounting issues
(say, the valuation of stocks and the non-current assets).
Firms, however, may elect not to comply with all the standards. In this vein, the auditors may
qualify the accounts to signal stakeholders accordingly. This notwithstanding, the academic
and accountancy press continue to debate about the suitability of both new and existing
standards. Here, it is argued that it is difficult to design rules that reflect the all commercial
situations that real companies operate in. Here too, directors may lose some of their
performance related pay if profits are reduced due simply to new accounting rules.
1.9 BASIC ACCOUNTING

CONVENTIONS/PRINCIPLES
The International Accounting Standards Board (IASB) has articulated a Statement of
Principles for Financial Reporting to define what should underlie the preparation and
presentation of general purpose financial statements. In addition to these fundamental
assumptions it is generally accepted that the following accounting conventions should be
applicable in all circumstances. These are discussed below.
1.9.1 Objectivity (independent valuation)

Subjectivity and personal involvement is dangerous. Accounting information
should not be based on subjective judgements, nor influenced by any personal bias
of whoever is presenting the information.
1.9.2 Substance over form

In The Enron case, executives pushed the rules (by not holding 3% of another
companys stock. Enron could choose to ignore huge liabilities/losses that might
be present in that subsidiary. In the UK or Ghana auditors would look behind the
strict rules to evaluate what the real effect was and thus have insisted that such
issues would be reflected in the group accounts.
1.9.3 Materiality
The amount involved before an amount is considered material will depend upon
the size of the firm, the time and effort required for the precise calculation, and the
judgement of the accountant. Too strict adherence to accounting principles may be
unnecessary in many trivial cases for example spreading the cost of a pencil over
its use.
26
1.9.4 Business entity
Accounting statements report on the activities of businesses, not the activities of
their owners. Whilst the separation of the business from its owners is
comparatively simple in the case of a large publicly owned organisation, it is not
so clear in the case of the small retail shop, where the owner and his family live in
the same premises in which the business is conducted. How much of the rent,
electricity, telephone and water charges are applicable to the business, and how
much to the owner and his family? The accounts of the business are concerned
only with those parts of revenues and expenses related to the business.
1.9.5 Money measurement

Only facts which can be expressed in monetary terms are included in financial
statements. Accounting is a measurement and communication process of the
activities of the firm that are measurable in monetary terms
Limitations apply:
accounting is limited to the prediction of information expressed in terms of
the monetary unit
accounting does not record or communicate other relevant information
should units of money or units of general purchasing power be used?
1.9.6 Historical cost

Assets and expenses are valued at cost price, or in the case of long-lived
assets, at their cost price less an appropriate amount to provide for
depreciation. But goodwill which has been purchased may stay in the accounts
as an asset until it is written off. This principle is very much influenced by the
objectivity criterion.
1.9.7 Dual aspect

Every business transaction has two aspects and it is this principle which is the
foundation of the double-entry system of book-keeping, e.g. stock is purchased
for cash - stock increases and cash decreases.
1.9.8 Stability of Money

The assumption that a pound or a dollar has a constant value from year to year
is not a reasonable assumption during periods of inflation, not to mention
countries like Zimbabwe. Accounting statements, however, accept this
assumption and accounts are produced on this basis. Attempts have been made
to account for inflation, and currently in the U.K. inflation adjusted accounts
are produced in addition to historical accounts.
27
SOUNDBITE 1.9: ACCOUNTING CONVENTIONS
Accounting Statements should satisfy the criteria of:
1. ECONOMIC REALISM - wider economic context Usefulness - to users (obviously!).
The interpretation of real events, states and transactions must be realistic in terms of
prevailing economic/market conditions.
2. USEFULNESS - Information should be useful to those readers to whom it is directed.

The conflicting requirements of these groups of users make the determination of what
is the most useful presentation very difficult, if not impossible.
3. MATERIALITY - significance of transactions and assets to the accounts (overrides

attempts to take the rules literally e.g. Enron)
Other conventions are:

1. Substance over form (principles over rules UK approach),
2. Business Entity separate from owners
3. Money Measurement not sheep!
4. Historical cost - not historic!
5. Dual aspect accounting mechanism
6. Stability of Money - no inflation
7. Periodicity at set time intervals
In many instances these can be in conflict. For example, Prudence may suggest that an asset
be valued at its current value, but Objectivity may suggest that Historical Cost be used. The
need to resolve this type of conflict is one of the reasons why many people consider
accounting to be an art rather than a science.
ACTIVITY 1.9: DUALITY

Describe in your own words what is meant by the concept of duality
ACTIVITY 1.10: RECOGNITION AND DISCLOSURE

Describe in your own words the difference between recognition and disclosure
1.10 LIMITATIONS OF FINANCIAL

ACCOUNTING
The limitations of accounting are several, but the key ones are discussed at this stage of the
material. First, accounting (financial accounting in particular) neglects business transactions
that cannot be quantifiable in monetary terms. Thus, critics argue that non-financial items
such as business opportunities, management strategies and risks have a significant impact on
the firms performance and need to be reflected in the company reports. In short, financial
accounting does not take into account the non-monetary facts of the business like the
competition in the market, change in the value for money etc.
Second, accounting considers historical cost but not current value of assets. Third.
accounting largely ignores the measurement of human resources of a business or its
28
knowledge and skills base. This suggests that the financial statements give a partial picture of
the businesss events.
Further, several other limitations of financial accounting have led to the development of Cost
Accounting. These include:
1. Financial accounting does not give a clear picture of operating efficiency. This, in
turn, suggests that increase or decrease of the accounting profit may be due to
inflation or otherwise but not efficiency or inefficiency.
2. Financial accounting discloses only the net result of the collective activities of a
business and thus, ignores profit or loss of each department. In this respect,
inefficiencies are not spotted out by collective results: It does not indicate profit or
loss of each department, job, process or contract. It does not disclose the exact cause
of inefficiency i.e. it does not tell where the weakness is because it discloses the net
profit of all the activities of a business as a whole. Likewise, loss or less profit
disclosed by the profit and loss account is a signal of poor performance of the firm,
but the exact cause of such performance is not within the scope of financial
accounting.
3. Financial accounting ignores issues concerning pricing: Put differently, costs are not
available to aid in price fixation of the products, services, production order and lines
of products.
4. Financial accounting ignores classification of cost such as relevant or irrelevant cost,

direct or indirect costs, controllable or uncontrollable overheads. This indicates that
planning and the control function may be deficient thus if cost accounting and
management accounting information is ignored. Specifically, it does not provide for a
proper control of materials and supplies, wages, labour and overheads. Financial
accounting also limits its scope to historical information, implying it reports cost
incurred. This historical data is summarised at the end of the accounting period,
implying it does not provide day-to-day cost information for making effective plans
for the upcoming years.
5. Make or buy decisions are beyond the scope of financial accounting. It also does not
facilitate taking critical financial decisions (e.g. replacement of labour by machines,
price in normal or special circumstances, production of a product to be continued or to
discontinued.
6. No analysis of losses. It fails to provide complete analysis of losses due to defective

material, idle time, idle plant and equipment. Thus, no distinction is made between
avoidable and unavoidable wastage.
7. Inadequate information for reports: It does not provide adequate information for
reports to outside agencies such as banks, government, insurance companies and trade
associations.
8. No answer to key questions such as:

a. Should an attempt be made to sell more products or is the factory operating to its
29
optimum capacity?
b. If an order or contract is accepted, is the price obtainable sufficient to show a
profit?
c. If the manufacture or sales, of product X were discontinued and efforts made to
increase the sale of Y, what would be the effect on the net profit?
d. Why the annual profit is of a disappointing amount despite the fact that output was
increased substantially?
e. If a machine is purchased to carry out a job, which at present is done by hand,
what
effect will this have on the profit line?
f. Wage rates having been increased by GH 50 per hour, should selling price be
increased and if so, by how much?
1.11 PRACTICE QUESTIONS

Q1. For what purpose is accounting information used?
a) By the individual
b) By the firm
Q2. Identify the needs of internal users and how they would be met?
Q3.Discuss the following statements:

a) The main aim of financial statement is for the CEO and his management team to
report to the shareholders that all monies received have been accounted for.
b) If a business is careful to record all the money received, and all money paid out, the
production of the financial statement is a matter of arithmetic.
Q4. Identify the main users of accounting information for Kwame Nkrumah University of
Science and Technology, Kumasi. Do these users, or the way in which they use
accounting information, differ very much from the users of accounting information for
a private sector?
Q6. What, in economic principle, should determine what accounting information is

produced? Should economics be the only issue here?
Q7. Financial accounting statements tend to reflect past events. In view of this, how can they
be of assistance to a user in making a decision when decisions, by their very nature,
can only be made about future actions?
Q8. Accounting reports should be understandable. As some users of accounting information

have a poor knowledge of accounting, we should produce simplified financial reports
to help them. To what extent do you agree with this view?
Q9. An accountant prepared a balance sheet for a business. In the balance sheet, the capital of
the owner was shown next to the liabilities. This confused the owner, who argued:
My capital is my major asset and so should be shown as an asset on the balance
sheet. How would you explain this misunderstanding to the owner?
30
Q10. In recent years there have been attempts to place a value on the human assets of a
business in order to derive a figure that can be included on the balance sheet. Do you
think humans should be treated as assets? Would human assets meet the
conventional definition of an asset for inclusion on the balance sheet?
Q11. State whether statement is True/False: If false, explain why.

a. Financial Accounting does not include non-monetary data.
b. Financial accounting will give you a correct picture of operating efficiency
irrespective of prices are rising or falling because of inflation or trade
depression.
c. Financial Accounting determines total profit and loss for each departments and
processes.
d. Financial Accounting does not determine cost per unit of product and services.
e. Financial Accounting classifies expenses into direct and indirect.
f. Financial Accounting provides data related to make or buy decisions.
31
CHAPTER 2: THE ACCOUNTING EQUATION
Accounting as a communication process
The accounting equations
Balance Sheet Glossary
The Balance Sheet Format
The Effects of Financial Transactions on the Balance Sheet
Practice Questions
AIMS:
To examine the statement of financial position as the key financial statement
INTENDED LEARNING OBJECTIVES
After studying this chapter candidates should be able to:
Explain the accounting equation as a representation of business.
Apply the definitions of assets, liabilities and ownership interest.
Record transactions by applying the convention of duality to an entitys economic
activities using the accounting equation.
2.0 ACCOUNTING AS A COMMUNICATION

PROCESS
This process involves two steps. First, Recognition: what to include in the key financial
statements. Second, Measurement: how to quantify it. The key financial statements are:
The Balance Sheet or Statement of Financial Position:
The Income Statement or Profit & Loss Account
The Cash Flow Statement
2.1 THE ACCOUNTING EQUATION

The accounting equation states that what a firm owns (assets) is financed by owners (equity)
and outsiders (liabilities).
Simply put:
Assets = Claim (1)

o Where:
o Assets are resources in the business and claims are resources supplied by both
the owners and third parties.
Assets = Owners Equity + Liabilities .. (2)

o Where:
o Equity and liabilities are resources supplied by the owners and third parties,
respectively.
o
32
Assets Liabilities = Equity (3)
o
o Where:
o Total Assets minus total liabilities is equal to net asset of the business.

Non-Current Assets + Current assets = Capital + Profit Drawings + Long Term
Liabilities + Current Liabilities (4)
o Where:
Non-Current Assets plus Current Assets is equal to Total assets.
Profit = Revenue less Expenses.
Capital + Profit minus the Drawings is equal to capital employed.
Capital + Profit - Drawings + Long term liabilities + Current Liabilities is equal to
total claims.
REAL WORLD 2.1

ACCOUNTING EQUATION AND THE BALANCE SHEETS
ECOBANK GHANA
FINANCIAL STATEMENT FOR TEN YEARS (2003-2012)
2003 2004 2005 2006 2007 2008 2009 2010
Assets 1,523,091 1,910,433 2,119,230 3,503,739 6,550,224 8,306,186 9,006,523 10,466,871
liabilities 1,386,238 1,743,847 1,895,531 3,021,424 5,898,464 7,148,564 7,770,958 9,174,261
Equity 30,351 38,039 303,879 482,315 513,548 1,003,210 1,235,565 1,292,610
ACTIVITY 2.1: FILL THE GAPS

Assets Liabilities Capital
GH GH GH
a) 25,000 3,600 ?
b) 56,000 9,600 ?
c) 33,600 ? 25,000
d) 39,200 ? 32,900
e) ? 12,600 17,600
f) ? 20,000 20,000
g) ? 11,700 40,000
2.2 BALANCE SHEET GLOSSARY

An asset is an entitys right to control future economic benefit as a result of past event. If not
an assets, then its expense. Assets may be current and non-current assets. This division
depends on the purpose of the assets in the business.
Cash denotes cash in hand and at bank, plus funds invested in cash equivalents.
Creditors (Payables) are suppliers who have not yet been paid for goods or services.
Current assets: money invested in working capital. Current Assets are intended to be kept in
a business for not more than one accounting period. Examples of Current Assets include
cash, account receivable and inventory.
33
Debtors (Receivables) are customers who have not yet paid for goods or services.
Drawings: cash or goods withdrawn from the business by the owner for private use.
Equity refers to the capital of the owner.
Goodwill denotes added value to a business of each factors as customer loyalty and expertise
of management.
Intangible Non-Current Assets lack physical identity, implying that we cannot see, feel and
touch these assets. Examples include goodwill and patent.
Inventory/Stock: goods held with the intention of resale. It includes raw materials, work in
progress and finished goods.
Non-Current liabilities are money owed to suppliers of funds which are repayable in more
than a years time. It includes debenture/loan stock and bank loan.
Non-Current Assets/Fixed Assets are intended to be kept in a business for more than one
accounting period. Put differently, the intention is not to sell but to use these assets in the
business. Examples of Non-Current Assets include Land, Plant Property and Equipment,
patent and trademarks. Non-current assets can be tangible or intangible assets. . This
division depends on the purpose of the assets in the business.
Reserves: profit retained in the business. It is also called profit and loss reserves or retained
earnings. Profit arises as a result of selling goods more than cost of purchase and expenses.
Tangible Non-Current Assets possess physical identity, implying that we can see, feel and
touch these assets. Examples include land, plant property and equipment, and motor van.
Working Capital/Net Current assets is current assets minus current liabilities.
ACTIVITY 2.2: CURRENT ASSET, NON-CURRENT ASSET OR COST?

Non-Current Current Assets Cost Liabilities
Assets
a) A white van
b) Bank deposit
c) Wages paid
d) Rent paid in
paid
e) Machinery
f) Loan from D
Jones
g) Cash in hand
h) Computers
i) Fixtures and
fittings
34
j) Warehouse we
own
2.3 THE BALANCE SHEET FORMAT

1. There two ways of presenting a trial balance either the vertical (see Table 2) or the
horizontal (see Table 2) format.
Maame Nyarko set up a business as a limited company called Maame Nyarko Plant
Repair Limited, repairing construction plant and equipment. She invested GH50,000
of their own money and borrowed 100,000 from the bank.
Required:
Show these events in the accounting equation format and draw up an initial balance
sheet for the company.
a) Using the vertical format
b) Using the horizontal format
Table 2: Maame Nyarko Plant Repair Ltd

Balance Sheet as at (date)
GH000
NET ASSETS
CURRENT ASSETS
Cash 150
TOTAL ASSETS 150
NON-CURRENT LIABILITIES
Bank Loan (100)
Net assets 50
Equity (ownership interest)

Share capital 50
50
Table 2: Maame Nyarko Plant Repair Ltd

Balance Sheet as at (date)
EQUITY & LIABILITIES GH000 NET ASSETS GH000
Share capital 50
LIABILITIES CURRENT
ASSETS
Bank Loan 100 Cash 150
TOTAL EQUITY& LIABILITIES 150 TOTAL ASSETS 150
35
2.4 THE EFFECTS OF FINANCIAL
TRANSACTIONS ON THE BALANCE
SHEET
2. Following from 2.3 above, the company then undertook the following transactions, all
of which were settled in cash:
a) Acquired workshop premises with office facilities (freehold) for GH70,000.
b) Purchased and equipped two vehicles at GH20,000 each, which would be used to
repair plant on clients own sites and purchased further maintenance and repair
equipment for the workshop totalling GH18,000.
c) Bought office equipment (a computer and related business management software, fax,
printer and photocopier) for GH4,500.
Required: Show these events in accounting equation format.
3. In the first month of trading, the following further transactions occurred:
a) Cleaning materials, lubricants and other consumables were ordered and received; the
supplier gave the company a months credit to settle the invoice, which totalled
GH6,000.
b) Various jobs were carried out for several different customers. In total, the work
invoiced came to GH10,000, but the company gave its customers a months credit.
c) Three skilled mechanics were employed; their wages were GH1,500 per person per
month and they were paid by cheque at the end of the month.
d) A check of the stores at the end of the month showed that one third of the cleaning
materials, lubricants and other consumables had been used.
Required: Show these events in accounting equation format and draw up a balance
sheet, income statement and a summary of cash flows for the first month of trading.
36
Maame Nyarko Plant Repair Limited
ASSETS - LIABILITIES = EQUITY

Non-current Accounts Accounts Bank Owners' Income
Item Description Assets Cash Inventory Receivable Payable Loan Capital statement
2a
2b
2c
3a
3b
3c
3d
37
Closing balances
Maame Nyarko
Plant Repair Limited
: Transactions for Month 1
ASSETS - LIABILITIES = EQUITY

Non-current Accounts Accounts Bank Owners' Income Balance
Item Description assets Cash Inventory Receivable Payable Loan Capital statement check
1 Initial capital 50,000 50,000 0

1 Bank Loan 100,000 100,000 0
2a Freehold premises 70,000 (70,000) 0
2b Vehicles 40,000 (40,000) 0
2b Workshop equipment 18,000 (18,000) 0
2c Office equipment 4,500 (4,500) 0
3a Consumables 6,000 6,000 0
3b Sales 10,000 10,000 0
3c Wages (4,500) (4,500) 0
3d Stock adjustment (2,000) (2,000) 0
0
0
Closing balances 132,500 13,000 4,000 10,000 6,000 100,000 50,000 3,500 0
Notes:
Depreciation of P,P&E has not been charged for the month although in a real business this would be appropriate.
38
Similarly, interest on the loan should be accrued, but we have no information about the interest rate.
39
Example 3: Using the accounting equation, draw up a statement of financial position at the
end of each months transaction.
Jan. 1, 2013 K.O starts a shop by introducing GH20,000.00 cheque.
The effect of this transaction is:

The business has GH20,000.00 bank
The business owes K.O (the owner) GH20,000.00- this is capital.
K.O
Balance Sheet as at Jan 31, 2013
GH GH
ASSETS CAPITAL &
LIABILITIES
Bank 20,000 Capital 20,000
Total assets 20,000 Total Claims 20,000
Feb. 2, Buys a motor car for GH8,000.00

The business has an asset of GH8,000.00, implying a reduction of another asset
by the corresponding amount.
The business has spent GH8,000.00 in cheque/bank.
.
This transaction changes the form in which the assets are held.
K.O
Balance Sheet as at Feb 28, 2013
GH GH
ASSETS CAPITAL & LIABILITIES
Non-Current Assets
Motor Van 8,000
Current Assets
Total assets 20,000 20,000
March 3, Bought goods (purchases) for GH8,000.00 paying by cheque.

The business has stock of 8,000.00
The business has spent 8,000.00 in cheque
40
Thus, a change in the form in which the assets are held. 8,000.00 is withdrawn from
cheque and invested in stock.
K.O
Balance Sheet as at March 31, 2013
ASSETS CAPITAL &
LIABILITIES
GH GH
Non-Current Assets
Motor Van 8,000
Current Assets
Stock 8,000
Total assets 20,000 20,000
April 4, Sold all goods bought on March 3 for GH 12,000.00 cash.

One asset (Stock) is being replaced by another (cash), but the amount do not
correspond.
Cash acquired 12,000.00
Asset sold (Stock) 8,000.00
Difference (=Profit) 4,000.00
Profit is the difference between purchase price and sales proceeds and it belongs to the
proprietor of the business.
Total assets have increase by 4,000.00, whereas capital increases likewise.
There are no liabilities involved, and thus, the accounting equation is now extended
to:
Non-Current Assets + Current assets = Capital + Profit + Current Liabilities

The business has received 12,000.00 in cash.
The business has reduced stock by 8,000.00 and made a profit of 4,000.00.
K.O
Balance Sheet as at April 30, 2013

GH GH
Non-Current Assets Capital 20,000
Motor Van 8,000 Profit 4,000
Current Assets
41
Bank 4,000
Cash 12,000
July 5, Purchase goods for GH8,000.00 on credit.

The business has stock of 8,000.00
The business has a liability to the supplier of 8,000.00
This shows that Assets can be increased by a corresponding increase in liabilities as
follows:
Thus, that the creditors are acting in effect as a source of finance for the business.
K.O
Balance Sheet as at July 31, 2013
GH GH
Non-Current Assets Capital 20,000
Current Assets Current liabilities
Stock 8,000 Creditors 8,000
Bank 4,000
Cash 12,000
August 6 Obtain loan of GH10,000.00 from Ghana Commercial bank.

The business has bank of 10,000.00
The business has a liability to GCB of 10,000.00
K.O
Balance Sheet as at August 31, 2013
GH GH
Non-Current Capital 20,000
Assets
Current Assets Long-term liabilities
Stock 8,000 Bank loan 10,000
Bank 14,000 Current liabilities
42
Cash 12,000 Creditors 8,000
September 7 Withdrew GH2,000 for personal use.

The business cash is reduced by 2,000.00
The Proprietor capital is reduced by 2,000.00.
Money and/or goods withdrawn for private use result in a decrease in owners capital but
recorded in the drawings account instead of the capital account. Put differently, where the
owner takes money from the business, applying the business entity concept, he is taking
part of his capital.
Thus, the accounting equation is now extended to:
Non-Current Assets + Current assets = Capital + Profit- Drawings + Current
Liabilities
K.O
Balance Sheet as at August 31, 2013
GH GH
Non-Current Capital 20,000
Assets
Drawings (2,000)
22,000
Current Assets Long-term liabilities
Stock 8,000 Bank loan 10,000
Bank 14,000 Current liabilities
Cash 10,000 Creditors 8,000
43
Q1. Draw up Nana Pokuas statement of financial position as at 31 March 2013 from the
following assets, liabilities and capital.
GH
Capital 20,400
Plant Property & Equipment 6,800
Payables 8,200
Inventories 7,200
Receivables 9,000
Bank 5,600
Q2. Draw up A Ampongs statement of financial position as at 31 December 2013 from the
following information.
GH
Capital 1800
Debtors 200
Motor Vehicle 950
Prepayments 100
Payable 300
Accruals 100
Land 450
Raw Material 200
Finished Goods 800
Work in Progress 50
Cash 75
44
Q3 Show the effects of the following on the capital, liabilities and assets.
Transaction Effect upon
Capital liabilities assets
a) We pay a creditor GH1,150 by cheque
b) We pay a creditor GH7,000 by cash
c) Bought fixtures GH2,000 paying cheque
d) Bought fixtures GH2,000 on account
e) Bought goods on credit GH2,750
f) Bought goods on credit GH2,750
g) The owner puts a further GH8,700 cash into the
business
h) A customer pays us GH5000 by cheque
i) A customer pays us GH5000 by cash
j) A customer pays us GH5000 by exchanging a
motor van in lieu of his debt
k) The owner withdraws GH8,700 cash from the
business as a gift to his wife on valentine day
l) Repaid by cash a loan owed to Paa Kusi
GH10,000
m) Return goods costing GH6,000 to a supplier
whose bill is outstanding
Q4. The following information relates to Appiah-Mensahs Shop as at 30 September, 2013:
GH
Capital at 1 October, 2012 117,500
Trade receivables 48,000
Long-term borrowing 51,000
Short-term borrowing 26,000
Trade payables 18,000
Plant and equipment 25,000
Cash in hand 1,500
Motor vehicles 15,000
Fixtures and fittings 9,000
Property 72,000
Inventories 45,000
Reserves 18,000
Drawings for the year 15,000
Required:
Prepare a statement of financial position for Appiah-Mensah as at 30 September, 2013.
45
Q5. On 1 March, Joe started a new business. During March he carried out the following
transactions:
1 March Deposited GH21,000 in a bank account.
2 March Bought fixtures and fittings for GH16,000 cash, and inventories
GH18,000 on account from Agya Koo.
3 March Borrowed GH51,000 from a relative and deposited it in the bank
4 March Bought a motor car for GH17,000 cash and withdrew GH2000 in
cash for his personal use.
5 March A further motor car costing GH19,000 was bought. The motor car
bought on 4 March was given in part exchange at a value of
GH16,500. The balance of the purchase price for the new car was
paid in cash.
6 March Appiah-Mensah won GH12,000 in a lottery and paid the amount into
the business bank account. He also repaid GH11,000 of the loan.
Required:
Draw up the balance sheet for the business at the end of each day.
Q6. The balance sheet of a business at the start of the week is as follows:
Assets GH000 Claims GH000
Property 145 Capital 203
Furniture& fittings 63 Payables 23
Finished Goods 28 Bank 43
Trade Receivables 33
269 269
During the week the following transactions take place:

a. Inventories sold for GH11,000 cash; these inventories had cost GH8,000.
b. Sold inventories for GH23,000 on credit; these inventories had cost GH17,000.
c. Received cash from trade receivables totalling GH18,000.
d. The owners of the business introduced GH100,000 of their own money, which
was placed in the business bank account.
e. The owners brought a motor van at GH10,000 into the business.
f. Bought inventories on credit for GH14,000.
g. Paid trade payables GH13,000.
Required:
Show the balance sheet after all of these transactions have been reflected.
Q7. You have been talking to someone who has read a few chapters of an accounting text
some years ago. During your conversation the person made the following statements:
a. The income statement shows how much cash has come into and left the
business during the accounting period and the resulting balance at the end of
the period.
b. In order to be included in the balance sheet as an asset, an item needs to be
worth something in the market that is all.
c. The balance sheet equation is: Assets + Capital = Liabilities
46
d. Non-current assets are things that cannot be moved.
e. Goodwill has an indefinite life and so should not be amortised.
Required:
Comment critically on each of the above statements, going into as much details as you
can.
47
UNIT 2: COMPLETING THE ACCOUNTING CYCLE
SCOPE
This unit considers the Double Entry Systems and Income Statement of a sole trader
CHAPTER 3: THE DOUBLE ENTRY SYSTEM

The double entry system
The benefits of the double entry system
The ten basic rules for double entry
An illustrative example
Balancing off the accounts
Three Column accounts
Preparing a trial balance
Practice Questions
AIMS:
To apply the duality principle in book-keeping, using debits, credits and ledger accounts
INTENDED LEARNING OUTCOMES:

Explain the labels debit and credit and apply them in book-keeping.
Record financial transactions using both the accounting equation and ledger accounts.
Extract a Trial balance
Prepare a straightforward balance sheet and income statement in appropriate formats.
3.0 THE DOUBLE ENTRY SYSTEM

The double entry system is the foundation for a complete financial accounting information
system. It illustrates the effects of every financial transaction. Specifically, it shows that every
transaction affects two items. The items affected by the transaction and only those items, are
shown as having changed. In this vein, the bookkeeping entry or the double entry
bookkeeping is required to show an increase or decrease of one item, and another entry to
depict the opposite. Put simply, each transaction is entered twice (double entry) in the
accounts. This in turn, saves the bookkeeper from drawing up balance sheets after each
transaction. An account denotes a place where a specific asset or liability is logged. An
account basically contains the debit (Dr) and credit (Cr) columns. This in part explains
why we have the terms debtors and creditors.
3.1 THE BENEFITS OF THE DOUBLE

ENTRY SYSTEM
The benefits of the use of the debit and credit include:
1) Easier preparation of the income statement. Accounts classification through the
double entry system can help in, for example, grouping all nominal account items
48
in the profit and loss accounts for the purpose of knowing the profit or loss for the
period.
2) Easier preparation of the statement of financial position: credit entries signify
obligations and debit entries the resources to meet those. Thus, a picture of the
companys financial obligations and the resources to meet them is always in focus.
Put differently, the double-entry system facilitates the setting out of the financial
position of the business at any moment in time. All debit balances are dubbed
assets. And all credit balances are dubbed liabilities in the balance sheet.
3) Errors identified via Trial Balance (but not all). Entry for transactions is made
twice, one on the debit side and the other at the credit side. This provides an
automatic check on the correctness of the records. For example, .if cash is
misappropriated other things being equal, it would be revealed by the accounts.
4) Fuller audit trail: it can be said that a company that has a good management can
use the double entry system to prevent unnecessary error, fraudulent manipulation
of accounting records and help in the early preparation of accounting records.
5) Quicker communication: the double entry system helps the business to associate
each person or business with the area of operation to which he is connected with
the business and the amount due on such operation. A suppliers account will
show a corresponding purchase entry, and a customers account is associated with
sales.
ACTIVITY 3.1A: DEMERITS OF DOUBLE ENTRY SYSTEM

Outline FOUR disadvantages of double entry system
Suggested solution
1. It gives an unreliable assurance that if the trial balance and the balance sheet agree at
the two sides then some accuracy prevails in the recording process. But not all errors
are disclosed by the trail balance.
2. It is time consuming and expensive since every transaction should be recorded at least
twice
3. It is complicated; it is not easy for a layman to understand the postings and mystique
of the transactions. Double entry can be properly done only by an expert.
4. Single entry system avails itself to anyone who can read and write to keep his own
records of his transactions. Double entry can be properly done only by an expert.
3.2 THE TEN BASIC RULES FOR DOUBLE

ENTRY
The ten basic rules for double entry are as follows:
1. Every single account should be shown on a separate page in the accounting books
For example: Motor Van, Plant Property & Equipment, Land and Fixtures and Fittings
may be presented in pages, 1, 2, 3 and 4 in the accounting books, respectively.
2. Every single account must have a unique title in the accounting books
Thus, the aim is to have a unique identity for items in the accounting books (see table
3 below).
49
Table 3 illustrates accounts names for three different assets
MOTOR VAN ACCOUNT
PLANT PROPERTY AND EQUIPMENT ACCOUNT
LAND ACCOUNT
3. Every single account should be divided into two halves: the left-hand side (debit side)
and the right-hand side (credit side) (see table 4).
Table 4 illustrates accounts divided into two halves

MOTOR VAN ACCOUNT
DEBIT SIDE CREDIT SIDE

LAND ACCOUNT
4. Assets balances and increases in assets are debited (see table 5)

5. Decreases in assets are credited (see table 5)
50
Table 5 illustrates assets balances, increases and decreases
MOTOR VAN ACCOUNT
DR CR
Balances brought forward
XXX
DR CR
Increases
XXX
LAND ACCOUNT
DR CR
Decreases
XXX
6. Liabilities balances and increases in liabilities are credited (see table 6)

7. Decreases in liabilities are debited (see table 6)
Table 6 illustrates liabilities balances, increases and decreases

CREDITORS ACCOUNT
DR CR
XXX
BANK LOAN ACCOUNT
DR CR
Increases
XXX
DEBENTURE ACCOUNT
DR CR
Decreases
XXX
8. Capital balances and increases in capital are credited (table 7)
9. A decrease in capital is debited (table 7)
51
Table 7 illustrates capital balances, increases and decreases
CAPITAL ACCOUNT
DR CR
XXX
Increases
XXX
DRAWINGS ACCOUNT
DR CR
Decreases in capital account
XX
10. The bank account may exhibit a debit or credit balance.

A favourable balance in the bank account denotes a debit and vice-versa.
SOUNDBITE 3.2: RULES OF DOUBLE ENTRY

ACCOUNTS Effect Entry
Non-Current Assets An increase Debit
A decrease Credit
Current Assets An increase Debit
A decrease Credit
Long Term Liabilities An increase Credit
A decrease Debit
Current Liabilities An increase Credit
A decrease Debit
Capital An increase Credit
A decrease Debit
Old accountants never die, they just lose their balance.

Double-entry bookkeeping is quite simple.
The same side as your watch.
Income and liabilities go on the opposite side.
Unless, of course, you are left-handed. In which case give up now.
3.3 CLASSIFICATION OF ACCOUNTS

There are two main classifications of accounts; these are personal Accounts and Impersonal
Accounts. Personal Accounts relates to accounts of persons dealing with the business. It also
comprise of accounts receivable (debtors) and accounts payable (creditors). The rule of thumb
52
is that in recording personal a/c prescribes that debit the receiver (one who receives
something) and credit the giver (one who gives out).
Impersonal Accounts relate to recording transactions of non-personal nature. It comprises of
real and nominal accounts. Real Accounts deal with impersonal assets account which relates
to tangible or intangible transactions such as land, furniture and building. Nominal Account
considers transaction which lacks physical substance. Examples include general expenses,
rent and revenue. In short, nominal accounts record both expenses and income. The basic
rules for recording increases and decreases in asset, liability and owners' equity accounts are
outlined in Sound Bite 3.2.
ACTIVITY 3.3A
Using the transactions below, identify which accounts are debited and credited for each
:
i. Adu Asamoah Plant Repair Limited was established with GH50,000 share capital and a
GH100,000 bank loan:
Debit: Credit:
ii. Acquired workshop premises with office facilities (freehold) for GH70,000 paid by
cheque.
Debit: Credit:
iii. Cleaning materials, lubricants and other consumables were ordered and received; the
supplier gave a months credit to settle the invoice, which totalled GH6,000.
Debit: Credit:
iv. Various jobs were carried out for several different customers. In total, the work invoiced
came to GH10,000, but the company gave its customers a months credit.
Debit: Credit:
v. Three skilled mechanics were employed; their wages were GH1,500 per person per
Debit: Credit:
53
Suggested Solution for Activity 3.3A: Adu Asamoah Plant Repair Ltd: Debits and credits
Note that the name of each account would be decided by the company accountant according to preference and need there are very few instances
where standard labels are used in Ghana, similar to the UK (although in France, for example, there is a Chart of Accounts which standardises
the names of the ledger accounts). If you have used different names for the accounts in your solution thats OK, so long as its clear what the
account is for!
i. Adu Asamoah Plant Repair Limited was established with GH50,000 share capital and a GH100,000 bank loan:
Debit: Cash GH50,000 Credit: Share Capital GH50,000

Debit: Cash GH100,000 Credit: Bank Loan GH100,000
ii. Acquired workshop premises with office facilities (freehold) for GH70,000 paid by cheque.
Debit: Freehold Property GH70,000 Credit: Cash GH70,000
iii. Cleaning materials, lubricants and other consumables were ordered and received; the supplier gave a months credit to settle the invoice,
which totalled GH6,000.
Debit: Inventory (Consumables) GH6,000 Credit: Accounts payable (Creditors) GH6000
iv. Various jobs were carried out for several different customers. In total, the work invoiced came to GH10,000, but the company gave its
customers a months credit.
Debit: Accounts receivable(Debtors) GH10,000 Credit: Revenue(Income/sales/turnover) 10000

v. Three skilled mechanics were employed; their wages were GH1,500 per person per month and they were paid by cheque at the end of the
month.
Debit: Cost of sales (Wages) GH4,500 Credit: Cash GH4,500
54
3.4 AN ILLUSTRATIVE EXAMPLE
In this section, I demonstrate the double entry systems for assets, liabilities and capital with
these transactions.
Example 3: Using the double entry principle enter the following transactions.
Jan. 1, 2013 Dr. K.O starts a store with cheque of GH20,000.00.
The dual effects of this transaction are entered as follows:

Effects Action
1. Increases the assets of bank Debit the Bank Account
2. Increases the capital Credit the capital account
Bank Account
DATE DETAILS DR DATE DETAILS CR
GH GH
Jan 1.2013 Capital a/c 20,000
Capital Account
GH GH
Jan. 1. 2013 Bank a/c 20,000
Note:
1. Always write the date of each transaction
2. The description of the transaction is called details or narrations or particulars.
3. In the bank account the description depicts the title of the other account.
4. This indicates that a cross-reference to the title of the corresponding accounts is
necessary to complete the double entry.
5. In short, the word capital will appear as the narrative for the bank account and vice-
versa.
Feb 2 Buy a motor car for GH8,000.00 by cheque.

Effects Action
1. Increases the assets of motor car Debit the motor car a/c
2. Decreases the asset of bank Credit the bank account
55
Bank Account
GH GH
Jan 1.2013 Capital a/c 20,000 Feb 1. Motor car 8,000
2013
Motor Van Account

GH GH
Feb 1. Bank A/C 8,000
2013
March 3 Bought goods (purchases) for GH8,000.00 paying by cheque.

Effects Action
1. Increases the assets of stock Debit the purchases a/c
(purchases)
2. Decreases the asset of bank Credit the bank account
Bank Account
GH GH
2013 Purchases 8,000
March 3.
13
Purchases Account
GH GH
Feb 1. Bank A/C 8,000
2013
Note: STOCK MOVEMENT

1. Purchases are goods bought for resale.
2. Increases in stock may either be purchases and/or returns from customers (return
inwards).
3. Decreases in stock may either be sales and/or returns to suppliers (return outwards).
4. Stock consumed and/or sold form part of expenses (i.e. cost of goods sold).
56
5. Stock not consumed and/or unsold form part of assets (i.e. closing stock).
April 4 Sold all goods bought on March 3 for GH 12,000.00 cheque.

Effects Action
1. Increases the assets of bank Debit the bank a/c
2. increases in revenue Credit the sales a/c
(Decreases the asset of stock and
increases in owners equity
profit)
Bank Account
GH GH
Apr. 4. 13 Sales a/c 12,000 2013 Purchases 8,000
Mar. 3. 13
Sales Account
GH GH
April Bank a/c 12,000
4.2013
June 5 Purchase goods for GH8,000.00 on account.

Effects Action
1. Increases the assets of stock Debit the Purchase a/c
2. increases in revenue Credit the sales a/c
(Decreases the asset of stock and
increases in owners equity
profit)
Purchases Account
GH GH
Feb 1: Bank a/c 8,000
2013
Jun 5, Creditor 8,000
2013 a/c
57
Creditor Account
GH GH
June 5: Bank a/c 8,000
2013
July 6 Obtain loan of GH10,000.00 from Ghana Commercial bank.

Effects Action
1. Increases the assets of bank Debit the Bank a/c
2. increases in liability of loan Credit the loan a/c
Bank Account
GH GH
Apr. 4. 13 Sales a/c 12,000 2013 Purchases 8,000
Mar. 3. 13
Jul 6, 2013 Loan a/c 10,000
Loan Account
GH GH
Jun 6.2013 Bank a/c 10,000
September 7 Withdrew GH2,000 for personal use.

Effects Action
1. Decreases the assets of bank Credit the Bank a/c
2. Decreases in capital account Debit the drawings a/c
Bank Account
GH GH
Jan 1.2013 Capital a/c 20,000 Feb 1. 13 Motor car 8,000
Apr. 4. 13 Sales a/c 12,000 Mar. 3. 13 Purchases 8,000
Jul 6, 2013 Loan a/c 10,000 Sept. 7: 13 Drawing 2,000
58
Drawings Account
GH GH
Sept, 7: 13 Bank a/c 2,000
3.5 BALANCING OFF THE BOOKS

T-accounts need to be balanced at the end of each accounting period or from time to time.
The balancing, in turn, assists the accountant to:
a. summarise the financial transactions.
b. calculate profit.
c. know the balance of an account.
3.5.1 How to balance an account

We use six-steps:
1. Sum up the debit side, resulting in total of the debit side.
Using the bank account above, the total of the debit side is GH42,000
(20000+12,000+10,000)
Bank Account
GH GH
2. Sum up the credit side, resulting in total of the credit side.
Using the bank account above, the total of the credit side is GH18,000
(8,000+8,000+2,000)
Bank Account
GH GH
59
3. If the total of the debit side exceeds the credit side deduct the latter from the former
and vice-versa. Put differently, subtract the smaller total from the larger total to find
the balance.
Using the bank account above, the total of the debit side is GH42,000, whereas the
credit side is GH18,000. This gives a difference of GH24,000
4. Enter the difference (hereafter balance) on the side with the smallest total. The
difference takes the last day of year/month as date and balance carried forward
(balance c/d) as narration. This indicates the totals will be equal.
Using the bank account above, the credit side has the smallest total of GH18,000
compared to the debit side of GH42,000. For this reason, we enter the difference of
GH24,000 on the credit side.
Bank Account
GH GH
Dec. 31.13 Balance C/d 24,000
5. Enter totals level with each other.
Bank Account
GH GH
42,000 42,000
6. Enter the balance on the line below the totals on the opposite side to the balance
shown above the totals. Here this takes the first day of the month following the year
end as date and balance brought forward (balance b/fwd) as narration.
60
Bank Account
GH GH
42,000 42,000
Jan. 1. 2014 balance b/fwd 24,000
Note:
1. The balance is regarded as a debit balance, if the total of the debit side exceeds the
total of the credit side.
2. The balance is regarded as a credit balance, if the total of the credit side exceeds the
total of the debit side.
3. The totals of some accounts (e.g. a debtor or a creditor) are often the same, implying
the account balances and thus, closed off.
3.6 THREE COLUMN ACCOUNT

The format of the Three-column accounts differs from the format of the traditional T-account.
The three columns consider: debit side (column 1), credit side (column 2) and the balance
(column 3). This indicates a balance of the accounts is extracted at the end of each
transaction. Put differently, the three-column accounts exhibit the same features of the bank
statement you will receive for a current account in any bank, say Ghana Commercial Bank.
DATE DETAILS DEBIT CREDIT BALANCE

GH GH GH
Using the Bank account above, the three-column account is:
BANK ACCOUNT
DATE DETAILS DEBIT CREDIT BALANCE
GH GH GH
Jan. 1. 2013 Capital a/c 20,000 20,000DR
Feb. 1. 2013 Motor Car a/c 8,000 12,000DR
Mar. 3. 2013 Purchases a/c 8,000 4,000DR
Apr. 4. 2013 Sales a/c 12,000 16,0000DR
Jul. 6. 2013 Loan a/c 10,000 26,000DR
Sept. 7. 2013 Drawings a/c 2,000 24,000DR
61
ACTIVITY 3.6:
USE THREE COLUMN LEDGER ACCOUNTS TO RECORD THESE
TRANSACTIONS
Jan 1. Adu Asamoah Plant Repair Limited was established with GH50,000 share capital and
a GH100,000 bank loan.
Jan 4. Acquired workshop premises with office facilities (freehold) for GH70,000 paid by
cheque.
Jan 6. Purchased and equipped two vehicles at GH20,000 each, which would be used to
repair plant on clients own sites and purchased further maintenance and repair
equipment for the workshop totalling GH18,000. All were settled by cheque.
Jan 8. Bought office equipment (a computer and related business management software, fax,
printer and photocopier) for GH4,500, paid by cheque.
Jan 15. Cleaning materials, lubricants and other consumables were ordered and received; the
supplier gave a months credit to settle the invoice, which totalled GH6,000.
Jan 17. Various jobs were carried out for several different customers. In total, the work
invoiced came to GH10,000, but the company gave its customers a months credit.
Jan 20. Three skilled mechanics were employed; their wages were GH1,500 per person per
Jan 31. A check of the stores at the end of the month showed that one third of the cleaning
materials, lubricants and other consumables had been used.
Suggested Outline for Activity 3.6

BANK ACCOUNT
Debit Credit Balance
Ref Date Description
Month
1
CAPITAL ACCOUNT
62
BANK LOAN ACCOUNT
PREMISES ACCOUNT
MOTOR VEHICLES
REPAIR AND MAINTENANCE ACCOUNT

CREDITOR ACCOUNT
PURCHASES ACCOUNT
WAGES ACCOUNT
63


SALES ACCOUNT
DEBTORS ACCOUNT
3.7 THE TRIAL BALANCE

A list of account balances in a double-entry accounting system. If the records have been
correctly maintained, the sum of the debit balances will equal the sum of the credit balances,
although certain errors such as the omission of a transaction or erroneous entries will not be
disclosed by a trial balance (The Chartered Institute of Management Accountants, 2000
Official Terminology). The trial balance presents the debit balances on one hand, and the
credit balances on the other. Simply put, it is a list of account balances organised in terms of
debit balances or credit balances as at a specific date. We check the arithmetical accuracy of
the debit and credit entries in the accounts by preparing a trial balance. Put differently, we
prepare a trial balance to check if there is a matching debit entry for every credit entry and
vice-versa. Here, the double entry principle prescribes that every debit entry must have a
corresponding credit entry and vice-versa. All things being equal, the total of all the items
recorded in all the accounts on the debit side should equal the total of all the items recorded
on the credit side of the accounts.
64
3.8 PREPARATION OF THETRIAL
BALANCE
I recommend a seven step approach in preparing a trial balance.
Step 1: state the name of the company.
Step 2: outline the title of the trial balance.
Step 3: highlight the date on which the trial balance is prepared.
Step 4: list the accounts from the ledger.
Step 5: enter their debit or credit balances in the debit and credit column of the trial balance.
Step 6: total the debit and credit columns of the trial balance.
Step 7: verify that the total of the debit columns equal the total of the Credit column.
Using Activity 3.6,

Adu Asamoah Plant Repair Limited:
Trial Balance as at January, 31 2013:
Account Debit Credit
GH GH
Cash XXX
Share Capital XXX
Bank Loan XXX
Freehold Property XXX
Vehicles XXX
Workshop Equipment XXX
Office Equipment XXX
Inventory: Consumables XXX
Accounts payable XXX
Sales XXX
Accounts receivable XXX
Wages XXX
Expenses XXX
Totals XXXX XXXX
Task: replace the XXX with the actual figures.
ACTIVITY 3.7: TRIAL BALANCE
Using the answer from Activity 13
prepare a trial balance for Adu Asamoah Plant Repair Ltd
ACTIVITY 3.8A: ERRORS NOT AFFECTING THE TRIAL BALANCE TOTALS
You are the Accountant of O.A Ltd, during your lunch break you overheard Mr Joseph
Agana, the bookkeeper, saying that If the trial balance balances that is the end of all my
problems, it indicates my accounts are correct. Comment on this statement, going into detail
as much as possible.
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Suggested Solution to Activity 3.8A: Errors not affecting the trial balance totals
Good afternoon, Mr Agana, Its easy to assume that if the trial balance balances, the
debits and credits entries in the accounts are correct.
This said, there are many types of error that will not affect the balancing of a trial
balance.
These errors include:
1) error of omission-when you have omitted an entry completely.
For example, if you have omitted both the debit and credit entries the
trial balance total will not be affected.
2) reverse entry-when you have completely reversed your entries and thus,
entered credit as debit and vice-versa.
For example, cash sales recorded as follows: debit sales and credit
cash.
3) error of principle-when you have entered in the wrong class of
account/impersonal account.
For example, van might be recorded in the electricity account,
implying assets recorded as expense.
4) error of commission-when you have entered in the wrong person
account/personal account
For example, goods purchased from KKD recorded as debit in the
purchase account but credited to KDKs account.
5) compensating errors-when you have made errors that cancel each other out.
For example, goods purchased from KKD for 1050 recorded as 1500 in
the books.
On the contrary, many types of error that affects the trial balance totals.
These include
1) addition errors/casting errors-either under cast or over cast in one account or
the summation of the trial balance totals,
2) using one figure for the debit entry and another for the credit entry;
3) single entry-entering only one side of the transaction.
4) transposition error-where the positions of the numbers within the figure are
changed.
For example, goods purchased from KKD for 1050 recorded in the
account of KKD as 1500
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SOUNDBITE 3.8 TRIAL BALANCE
The trial balance is a snapshot of the balances on the ledger accounts at a specific
date.
Put differently, the date of the last day of the accounting period to which it relates.
The totals of the two columns: debits and credits must always match.
A trial balance can be drawn up at any time.
This said, it is normal practice to prepare a trial balance at the end of an accounting
period.
The trial balance, in turn, provides the required information for the preparation of the
income statement and statement of financial position.
Closing stock is not recorded as part of the trial balance.

Q1. Ophelia Opoku Appiahs trial balances as follows:
GH GH
Sales 100,000
Shop 60,000
Van 50,000
Purchases 60,000
Capital a/c 172,800
Bank 100,000
General expenses 1,000
Returns inwards 300
Repairs 800
Akosua Nyarko (debtor) 2,000
Abena Pokua (creditor) 1,600
Telephone 300
274,400 274,400
Unfortunately, Ophelia Opoku Appiahs bookkeeper was not very experienced. The following
transactions were incorrectly entered.
a) Purchase of a computer for 3,000 cash completely omitted.
b) Credit sales of 800 to Akosua Nyarko forgotten.
c) A photocopier worth 800 wrongly debited to the shop account
d) 300 credited to Abena Pokuas account should have been charged to Akosua
Nyarko as it was a sales return.
e) The van really cost 5,000, but had wrongly been recorded as costing 50,000
in both the van and bank accounts.
Required:
A corrected trial balance as at 31 December.
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Q2. Maame Nyarko commenced business with GH20, 000,000 in her bank account (with
Ecobank Ghana Limited) and cash of GH 40,000,000 on Jan 1, 2014. During her first month
of operation, the following transactions took place:
2014
Jan. 1 Bought a shop for GH 4,000,000 and paid with a cheque.
Jan. 2 Bought goods with cash, GH 30,000,000.
Jan. 4 Purchased fittings with cash GH 4,000,000.
Jan 6 Sold goods for cash GH 16,000,000.
Jan 7 Purchased goods for resale with a cheque of GH 14,000,000.
Jan 8 Paid wages of GH 200,000 to an Assistant with cash.
Jan.9 Sold goods of GH 1,000,000 to Kwaku Atobora Manu.
Jan. 10 Paid cash of GH 4,000,000 into bank.
Jan. 12 Purchased goods of GH 30,000,000 from Kofi Atobora Manu.
Jan 13 Cash sales GH 20,000,000.
Jan 14 Sold goods and received a cheque of GH4,000,000.
Jan 15 Cash purchases GH 8,000,000.
Jan 16 Paid 3 assistants their wage of GHS 200,000 each with cash.
Jan 21 Cash sales GH 25,000. Paid electricity bill of GHS 200,000 with cash.
Jan 22 Paid GH 40,000 cash into bank.
Jan. 23 Paid half of amount owed to Kofi Atobora Manu with a cheque.
Jan 24 Kwaku Atobora Manu settled her account with cash.
Jan. 25 Withdrew cash of GH 2,000,000 from bank for business use.
Jan. 26 Cash sales GH 60,000,000.
Jan. 28 Paid Cash of GH36,000,000 into bank.
Jan. 30 Purchased office equipment with cash, GH 4,000,000.
Jan. 31 Purchased a motor vehicle with cash of GH 15,000,000.
Jan 31. Withdrew GH 4,000,000 cash and GH 2,000,000 from the bank for
personal use. Paid all cash into bank except a balance of GH
2,000,000.
Required:
a. Record the above transactions in books Maame Nyarko.
b. Balance the account as at January 31, 2014
c. and extract a trial balance as at January, 31, 2014.
Q3. In book-keeping, an asset is a debit balance.

If you have money in the bank, your bank statement shows a credit balance.
Why?
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Q4. Akosua Nyarko has the following balances as at 31 January, 2014 in her accounts
GH GH
Return outwards 1,000 Bank 7,200
Capital 90,600 Sales 200,000
Motor car 6,000 Long-term loan 18,000
Building 140,000 Wages 7,000
Office furniture 800 Miss Williams (creditor) 1,100
Appiah Kwarteng 500 Isaac Boakye (debtor) 300
(debtor)
Appiah Moses (creditor) 700 Power 2,800
Purchases 140,000 Business rates 3,600
Rent 3,200
Required:
(1) Akosua Nyarkos trial balance as at 31 January, 2014
(2) An indication of which balances are assets, liabilities, capital, income or
expenses.
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CHAPTER 4: THE INCOME STATEMENT
The purpose of the income statement
After you have studied this chapter, you should be able to
Explain why income statements are not part of the double entry system
Explain why profit is calculated
Calculate cost of goods sold, gross profit and net profit
Explain the difference between gross profit and net profit
Practise Questions
AIMS:
To construct an income statements

By the end of this topic you should be able to:
describe how the Income Statement shows a picture of the firm over time,
identify revenue and expenses,
explain the concept of revenue recognition,
adjust various expenses to the income period to which they relate.
4.0 INCOME STATEMENT GLOSSARY

The Income Statement or profit and loss or statement of comprehensive income or income
and expenditure shows the financial performance of the business over a period of time,
normally a year, a quarter, or a month. It shows how, over a certain period of time, a firm has
earned income and incurred expenses in earning that income. For this reason, the accountants
must ensure that expenditure is correctly matched with income for the period.
Profit is the difference between the income (also called sales, turnover or revenue) earned and
the total expenses that relate to the same time period. Thus, profit (loss) for a period is
calculated by subtracting the total expenses incurred in generating the revenue. As well, the
difference is referred to colloquially as the bottom-line. A loss, however, may result if the
expenses are greater than income. In short, the difference between the revenue earned and
expenses incurred is either a profit (surplus) or a loss (deficit).There are a number of profit
including Gross Profit, Net Profit, Profit After Tax, Retained Profit, Operating Profit, Profit
Before Tax, etc. These, in turn, show that there are several stages in the computation of profit,
suggesting that one should be careful to state which profit figure he/she is referring to.
SOUND BITE 4.0: DEFINITION OF INCOME STATEMENT

A key financial statement which represents a firms income less its expenses over a period of
time and thus determines its profit so as to give a true and fair view of a firms financial
performance.
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4.1 IMPORTANCE OF THE INCOME
STATEMENT
The income statement helps the business to answer the question:
Are we making a profit or a loss? The loss or profit, in turn, will:
1) help the firm to plan.
2) help the firm to obtain loans from banks and individuals.
3) tell potential firm partners how healthy the firm is.
4) tell a probable client how successful the firm is.
5) tell a probable suppliers how successful the firm is.
6) tell a probable acquirer how successful the firm is.
7) help investors to assess how the performance of management.
8) enable the calculation of tax payable to the tax authorities.
4.2 THE FORMAT FOR THE TRADING

ACCOUNT
The aim of the trading account is to ascertain the gross profit. The gross profit is the
difference between the net sales and cost of sales. Gross sales less sales returns is equal to net
sales. Cost of sales (COS) is sometimes called cost of goods sold (COGS). The COS/COGS
is calculated in two steps:
Step 1: Opening Inventory plus Purchases plus Carriage Inwards less

Purchases Returns =Cost of Goods Available For Sale.
Step 2: Cost of Goods Available For Sale less Closing Inventory
Note: Opening Inventory also called opening stock denotes the finished goods at the
beginning of the accounting period, normally January 1, thus if the accounting period is
January to December. Following from this, Closing Inventory also called Closing Stock
denotes the finished goods at the end of the accounting period, normally December 31. This
said the closing stock as at say December 31, 2013, is automatically the opening inventory for
January 1, 2014. The opening stock balance is recorded in the general journal and thus,
recognized/recorded in the trial balance. The closing stock, however, is disclosed, implying it
doesnt form part of the trial balance totals.
The Gross profit by calculation is Sales less COS = Gross Profit. If the COS, however,
exceeds the sales, the difference is a gross loss (assuming there are no sales returns). If there
is a sales returns the gross profit or gross loss is calculated as Net Sales less COS = Gross
Profit/loss. In short, the gross profit is the excess of the net sales
revenue/turnover/income/interest/fees over the cost of sales.
Activity 4.2: Calculate the gross profit or gross loss of each of the following
Cost of sales Sales Gross profit/
(gross loss)
GH GH GH
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a. 8,760 10,676
b. 9,580 16, 076
c. 10,500 15,000
d. 7,530 5,730
e. 9,820 28,200
f. 7,860 8,760
g. 8,920 2,980
h. 15,000 51,000
Activity 4.3: calculate the gross profit or gross loss for Maame Nyarko for Week 1 to 4
Week Opening Purchases Closing Sales Gross
stock stock Profit/loss
GH GH GH GH GH
1 3,000 13,000 3,600 24,000 ???
2 3,600 16,000 610 18,000 ???
3 610 18,709 7,109 17,089 ???
4 7,109 78,090 9,013 77,109
4.3 THE FORMAT FOR THE PROFIT AND

LOSS ACCOUNT
The aim of the profit and loss account is to ascertain the net profit. The net profit is the
difference between the gross profit plus any other revenue (e.g. rent received, commissions
earned) less total expenses incurred. The net profit is sometimes called the operating profit or
the profit before interest and tax. The net profit by calculation is Gross Profit + Other Income
less Total Expenses. If the total expenses, however, exceeds the gross profit, the difference is
a net loss.
If there is a sales returns the gross profit or gross loss is calculated as Net Sales less COS =
Gross Profit/loss. In short, the gross profit is the excess of the net sales
revenue/turnover/income/interest/fees over the cost of sales.
SOUND BITE 4.3: GROSS PROFIT & NET PROFIT

GROSS PROFIT NET PROFIT
Aim of the trading account Aim of the profit and loss account
The excess of sales over cost of sales The excess of gross profit over all
other expenses
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ACTIVITY 4.4: USING THE ANSWER FROM ACTIVITY 4.2, FILL IN THE GAPS
Other revenues Expenses Net profit/(net loss)
GHs GHs
a. 4,320 6,700
b. 5,800 6,000
c. Nil 2.555
d. Nil 1,980
e. Nil 5,209
f. 2,980 2,897
g. 3.290 2,404
h. Nil 1,980
4.4 PUTTING IT ALL TOGETHER

The income statement of Paulina Osei is presented in the vertical format in the table below.
Please refer to the respective comments for a brief description of the item on the left hand
side. Note comments are provided to assist you understand the layout of the income
statement.
Paulina Osei Comment
Trading and Profit and Loss Account for the year ended 31 December 2013
GH GH
Sales XXX 1
Less Sales Returns XX 2
Net Sales XXX 3
Less: Cost of sales 4
Opening stock XXX
Add Purchases XXX
Add Carriage Inwards XXX
Less Purchases Return XXX
Cost of Goods Available for XXX
Sale
Less Closing Stock XXX 5
XXX
Gross Profit XXX
Add other income XXX 6
XXX 7
Less Expenses 8
Wages XX
Rates and water XX
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Insurance XX
Electricity XX
Telephone XX
Advertising XX
Motor expenses XX
Repairs and renewals XX
Laundry XX
Music and entertainment XX
Licences XX
Guard dog expenses XX
Garden expenses XX
Accounting cost XX
Depreciation XX 9
XXX
Net Profit XXX 10
Comment 1-SALES
Sales also called revenue is governed by IAS 18. IAS 18 outlines the accounting requirements
for when to recognise revenue from the sale of goods, rendering of services, and for interest,
royalties and dividends. Revenue is measured at the fair value of the consideration received or
receivable and recognised when prescribed conditions are met, which depend on the nature of
the revenue.
The objective of IAS 18 is to prescribe the accounting treatment for revenue arising from
certain types of transactions and events. Revenue is the gross inflow of economic benefits
(cash, receivables, other assets) arising from the ordinary operating activities of an entity
(such as sales of goods, sales of services, interest, royalties, and dividends). [IAS 18.7].
Revenue should be measured at the fair value of the consideration received or receivable.
[IAS 18.9]. An exchange for goods or services of a similar nature and value is not regarded as
a transaction that generates revenue. However, exchanges for dissimilar items are regarded as
generating revenue. [IAS 18.12]. If the inflow of cash or cash equivalents is deferred, the fair
value of the consideration receivable is less than the nominal amount of cash and cash
equivalents to be received, and discounting is appropriate. This would occur, for instance, if
the seller is providing interest-free credit to the buyer or is charging a below-market rate of
interest. Interest must be imputed based on market rates. [IAS 18.11].
Recognition, as defined in the IASB Framework, means incorporating an item that meets the
definition of revenue (above) in the income statement when it meets the following criteria:
it is probable that any future economic benefit associated with the item of
revenue will flow to the entity, and
the amount of revenue can be measured with reliability
IAS 18 provides guidance for recognising the following specific categories of revenue:
74
Sale of goods: Revenue arising from the sale of goods should be recognised when all of the
following criteria have been satisfied: [IAS 18.14]
the seller has transferred to the buyer the significant risks and rewards of
ownership.
the seller retains neither continuing managerial involvement to the degree
usually associated with ownership nor effective control over the goods sold.
the amount of revenue can be measured reliably.
it is probable that the economic benefits associated with the transaction will
flow to the seller, and
the costs incurred or to be incurred in respect of the transaction can be
measured reliably.
Rendering of services: For revenue arising from the rendering of services, provided that all
of the following criteria are met, revenue should be recognised by reference to the stage of
completion of the transaction at the balance sheet date (the percentage-of-completion
method): [IAS 18.20]
the amount of revenue can be measured reliably;
it is probable that the economic benefits will flow to the seller;
the stage of completion at the balance sheet date can be measured reliably; and
the cost incurred, or to be incurred, in respect of the transaction can be
measured reliably.
When the above criteria are not met, revenue arising from the rendering of services should be
recognised only to the extent of the expenses recognised that are recoverable (a "cost-
recovery approach". [IAS 18.26]
Interest, royalties, and dividends: For interest, royalties and dividends, provided that it is
probable that the economic benefits will flow to the enterprise and the amount of revenue can
be measured reliably, revenue should be recognised as follows: [IAS 18.29-30]
interest: using the effective interest method as set out in IAS 39
royalties: on an accruals basis in accordance with the substance of the relevant
agreement
dividends: when the shareholder's right to receive payment is established
Disclosure [IAS 18.35]:

accounting policy for recognising revenue
amount of each of the following types of revenue:
o sale of goods
o rendering of services
o interest
o royalties
o dividends
o within each of the above categories, the amount of revenue from
exchanges of goods or services
SOUND BITE 4.4: INCOME/SALES

This represents the amount of goods sold or services supplied during the period usually
recognised at the moment of dispatch to the customer. But it is not always so straightforward
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and some firms seek to push the convention to their own advantage, for example scotch
whisky - sold to banks and then bought back later after several years maturation but the
barrels have never left the distiller.
Sales only represents the sales of items that the business usually trades in. For example, the
A-Life Limited would include sales of consumer goods in its calculation of gross profit it
would not record the sale of, say, some old car as sales. The latter would represent the
disposal of a fixed asset and as such is not part of the normal trading activities of the
business. This would be shown as Other Income.
ACTIVITY 4.5: REVENUE RECOGNITION
Maame Ama enterprise receives an order on 14 October 2013 from Nana Ama & Associates.
Maame Ama delivers it (Nana Ama accepts it) on 25 December 2013. Maame Ama raises the
invoice on 26 January, 2014 and receives payment on 20 February 2014.
Task:
When was the sale made i.e. when will the business record the sale/revenue?
Comment 2: SALES RETURNS

Customers may return goods for several reasons including change of mind, damage goods,
wrong specification, excess requirement and many others. The customer should return the
goods to the firm with a debit note. The firm, in turn, should issue a credit note to
acknowledge the receipt of the returned goods. Invoking the dual concept, the return inwards
account is debited to reduce the sales figure and the customers/debtors account credited to
reduce the amount due accordingly, in the books of the firm. The firm closes off the sales
account by debiting it with the trading account, implying that the sales figure represents a
credit balance in the trading account. The opposite is true for the return inwards account. Put
otherwise, the firm closes off the returns inwards account by crediting it with the trading
account, implying that the return inwards figure represents a debit balance in the trading
account. In short, the firm deducts the return inwards figure from the sales figure in the
trading account to ascertain the net sales.
Comment 3: NET SALES

Net sales is calculated by deducting the sales returns from the gross sales. In practice,
however, there may be no sales return or return inwards, suggesting that the gross sales figure
is automatically the net sales.
Comment 4: COST OF SALES

Cost of sales represents the cost of buying, or making, those goods that are sold during the
period Cost of Sales is calculated by subtracting closing stock from the cost of goods
available for sale. Where cost goods sold is the summation of beginning inventory, purchases,
carriage inwards but less purchases returns. The firm may also returned goods to suppliers
resulting in purchases returns or return outwards. The firm should issue a debit note to the
suppliers with respect to the amount of the returned goods. The supplier, in turn, should issue
a credit note to acknowledge the receipt of the return goods. Invoking the dual concept, the
return outwards account is credited to reduce the purchases figure and the suppliers/trade
payables account debited to reduce the amount due accordingly, in the books of the firm. The
firm closes off the purchases account by crediting it with the trading account, implying that
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the purchases figure represents a debit balance in the trading account. The opposite is true for
the return outwards account. Put otherwise, the firm closes off the returns outwards account
by debiting it with the trading account, implying that the return outwards account figure
represents a credit balance in the trading account. In short, the firm deducts the return
outwards figure from the purchases figure in the trading account to ascertain the net
purchases. Finally, the carriage inwards include freight and shipping charges.
SOUNDBITE: 4.5 COST OF SALES

1. A Meat Pie factory processes raw meat into finished pastries along with other ingredients
such as, flour, onions, sugar, salt and seasoning. Additionally, direct labour is mostly
employed to make the meat pies and, along with the running costs of the factory, would be
shown in the cost of sales and in the valuation of any inventory.
2. A burger bar buys and sells burgers made from buns, meat, relish, cheese, (and those little
bits of gerkin!). This is essentially a retailing (trading) activity and so we tend not to include
the cooking labour - seeing this as a more incidental part of the general or a sales expense.
This allows mark-up on food to be monitored carefully and there will not be any cooked
inventory to be valued at the year end.
Published accounts do not require Gross Profit and hence Cost of Sales to be disclosed, but
each business can choose how it arrives at a Gross Profit that helps it to understand the
management of its business.
For example, if the standard mark-up on a DVD is 50% for a retailer, then the gross profit
actually achieved in each retail unit should be at least 50%. Alarm bells will ring if the Gross
Profit in the accounts is less than 50%, as this could indicate shoplifting or staff fraud.
Comment 5: INVENTORY
IAS 2 Inventories contains the requirements on how to account for most types of inventory.
The standard requires inventories to be measured at the lower of cost and net realisable value
(NRV) and outlines acceptable methods of determining cost, including specific identification
(in some cases), first-in first-out (FIFO) and weighted average cost.
The objective of IAS 2 is to prescribe the accounting treatment for inventories. It provides
guidance for determining the cost of inventories and for subsequently recognising an expense,
including any write-down to net realisable value. It also provides guidance on the cost
formulas that are used to assign costs to inventories.
Inventories include assets held for sale in the ordinary course of business (finished goods),
assets in the production process for sale in the ordinary course of business (work in process),
and materials and supplies that are consumed in production (raw materials) [IAS 2.6].
However, IAS 2 excludes certain inventories from its scope: [IAS 2.2]
work in process arising under construction contracts (see IAS 11 Construction
Contracts)
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financial instruments (see IAS 39 Financial Instruments: Recognition and
Measurement)
biological assets related to agricultural activity and agricultural produce at the point of
harvest (see IAS 41 Agriculture).
Also, while the following are within the scope of the standard, IAS 2 does not apply to the
measurement of inventories held by: [IAS 2.3]
producers of agricultural and forest products, agricultural produce after

harvest, and minerals and mineral products, to the extent that they are
measured at net realisable value (above or below cost) in accordance with
well-established practices in those industries. When such inventories are
measured at net realisable value, changes in that value are recognised in profit
or loss in the period of the change.
commodity brokers and dealers who measure their inventories at fair value less
costs to sell. When such inventories are measured at fair value less costs to
sell, changes in fair value less costs to sell are recognised in profit or loss in
the period of the change.
Fundamental principle of IAS 2: Inventories are required to be stated at the lower of cost
and net realisable value (NRV) [IAS 2.9].
Measurement of inventories: Cost should include all: [IAS 2.10].
costs of purchase (including taxes, transport, and handling) net of trade
discounts received
costs of conversion (including fixed and variable manufacturing overheads)
and
other costs incurred in bringing the inventories to their present location and
condition
SOUND BITE 4.6: INVENTORIES

The basic principle is that inventory should be valued at the lower of either its historical
purchase cost or its present net realisable value. The method of valuing inventory is important
because it affects both the Cost of Sales figure, and hence profit, and the value of the
inventory in the Income Statement.
Firms which manufacture or trade will tend to hold an inventory of goods to enable them to
meet customer demand. At the end of the year, when the cost of goods sold is calculated, it is
necessary to make an adjustment to recognise the inventory that has not been sold.
This inventory will then become a cost (expense) to the business in the following year - as it
becomes opening inventory in the subsequent period and thus will increase the cost of sales.
Activity 4.6: Cost and Net Realizable Value

October 1, 2013 Continental Supermarket purchased 100 boxes of Christmas biscuits at
GH10.00. Continental, however, due to obsolescence, can only sell them today, say, January
2014, for 2.00 per box and with a cost of transporting them to the customer of 40 for the
load.
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How should Continental value these biscuits as at January 31, 2014 and why?
ACTIVITY 4.7: MICHAEL ENTERPRISE

Michael, a student at Stanford Bridge University College, wishes to earn some extra income
by selling copies of an electronic student newsletter which he intends to produce every
semester. Each disk will contain course gossip, topical articles and, controversially, help on
coursework. Michael decides to use recordable Blue Ray disks to record the newsletter and
these can be purchased from a computer retailer in minimum quantities of 100 disks at GH3
per disk.
Transactions
Semester 1 - Michael purchased 100 disks and sold 80 newsletters to fellow students at
GH4.50 per disk.
Semester 2 - Michael purchased a further 100 disks and sold 110 newsletter at GH4.50 each.
Semester 3 - Unfortunately, Michael's scheme provided a bit more guidance to students than
the University approved of some of these were the coursework answers provided by
Michael's cousin (Drogba), who had completed the same course the previous three semesters.
Michael was advised to quickly close down her little scheme, by his Daddy (Jose). Somewhat
embarrassed, Michael decided to comply and quickly sold her remaining inventory of 10
disks to his cousin (Obi) for GH2 per disk.
Required:
Prepare the following:
a. an income statement for each of the 3 semesters
b. a statement of cash flow for each of the 3 semesters
c. a statement of financial position as at the end of each semester
Comment 6: EXPENSES
Expenses are items of expenditure which have been "enjoyed by the firm in the same
accounting period. These may differ to the amounts that have been paid in cash. Adjusting the
accounting entries in this way is called the accruals concept. It is worth noting that the
accrual concept (matching convention) is one of the fundamental conventions of accounting.
It prescribes that revenue and expenses must be matched to the time period to which they
relate and expenses matched to income.
Accruals - Some changes which must be taken into account may not even have been invoiced
by the supplier until after the year end. For example, the electricity consumed in December
might not be billed until February. Thus the accountant has to estimate and provide for
(accrue) these charges.
We call expenses that are outstanding at the end of an accounting period accruals. They are
recorded in the accounts even though no formal charge (physical invoice) has been received
from the supplier. The most common examples for both individuals and organisations are
electricity and gas charges. Accruals arise because of the need to apply the matching
convention.
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ACTIVITY 4.8: ACCRUAL EXPENSES
Woyome Gate Limited Ltd is preparing its year end accounts for 31 December 2013. An
invoice for electricity for the quarter ending 31 January 2014 is expected for GH600. The
estimate is based on the previous years charge plus a 12. 5% uplift for inflation and a10%
uplift for increased activity of collecting judgement debts from the Ghana Government.
What portion of the GH600 must be accrued as an expense for 2013?

Suggested solution to activity 21:
2/3 of GH600 = GH400
ACTIVITY 4.9: ENTRIES OF ACCRUAL EXPENSES

a. What are the entries in the Balance Statement?
b. What are the entries in the Profit and loss account?
Suggested solution to activity 4.9 a and b
We add accruals at the end (say 400) to the expense paid figure (say 1,500).
Thus, 1500 plus 400 is equal to 1,900.
We debit the profit and loss account with 1,900 in the name of electricity expense.
We credit the current liabilities with 400 in the name of electricity due.
Prepayment, however, is treated as opposite to accruals. Thus, there is an element of forward

charging by the supplier which needs to be adjusted. For example, if GH2,000 has been paid
on April 1, 2013 then there is a prepaid element of GH500 at December 31, 2013 which
relates to 2014.
SOUND BITE: 4.7 ACCRUALS AND PREPAYMENTS

ACCRUALS PREPAYMENTS
Amount of expenses paid XXX Amount of expenses paid XXX
Less accruals at beginning XXX Add prepayments at beginning XXX
Add accruals at end XXX Less prepayments at end XXX
Profit and loss account XXX Profit and loss account XXX
Comment 9: DEPRECIATION
When, items purchased for use in the business are to be kept for more than one accounting
period, i.e. non-current assets, it is prudent to 'charge' the business for that usage over the
period of time for which those assets are useful to the business. Put differently, to translate
the capital cost in the balance sheet into an expense in the income statement as the asset
reduces in terms of its value to the business. Thus depreciation systematically allocates the
cost of a fixed asset as expense across a number of accounting periods.
The easiest and simplest method of depreciation is the straight line method. This is given by
the formulae: {cost of the assets (say 5,000) less estimated residual value (say 500)}
80
divided by the useful economic life of the assets (say 5years). Thus, every year 900 is
charged as depreciation in the profit and loss account. This said, the statement of financial
position displays the cost of the assets less depreciation for year one. Subsequently, the
statement of financial position displays the cost of the assets less accumulated depreciation
over the years. The major drawback of the straight line method is its implied assumption that
the usage of the assets is evenly spread over its useful economic life. This assumption may
not be true in the real world, implying that the depreciation charge may not reflect the actual
usage of the assets.
Vehicles, for example, lose their value at a faster rate in the early years of their life and the
reducing balance method will front-load the charges. Put differently, there should be a
separate depreciation charge for each year depending on the type of asset. Therein lays the
justification of the reducing balance method. Worked example: Reducing balance method
using 20% rate of depreciation
Worked example: Reducing balance method using 20% rate of depreciation

Year 1 charge 40,000 x 20% = 8,000 written down/book value = 32,000
Year 2 charge 32,000 x 20% = 6,400 written down/book value = 25,600
Year 3 charge x 20% = . written down/book value = .... etc.
Note: that due to the non-linear nature of this function, the assets value doesnt reach zero in
theory. In practice, the type of assets that this method is applied to, such as motor cars, tend to
be replaced faster than other types of asset such as office equipment. On disposal a small
balancing charge (or profit) may result.
The depreciation rate of 20% was calculated by taking the square root of the cost.
The sum of the years digits method front weights depreciation more dramatically and
without the need for complex calculations. For example, in the first year the charge would be
40,000/(4/4+3+2+1) = 40,000/(4/10) = 10,000.
Alternatively, we can depreciate the asset according to its actual usage against that expected
over its useful life, e.g. miles travelled, again tending to front-load the charge but more
significantly turning an otherwise fixed expense into a variable one (the significance of this
will become clear in management accounting).
SOUND BITE 4.8 OVERVIEW OF INCOME STATEMENT

Sales
Less
Cost of Sales
Equals
Gross Profit
Add
Other income
Less
Expenses
Equals
Net profit
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4.5 AN ILLUSTRATIVE EXAMPLE
This exercise starts with an Income Statement that has already been prepared by the owner
previously, but which needs adjusting in line with the principles we have discussed. Naana
Pokua purchased a mobile pizza bar after being made redundant. In his first 6 months of
trading Naana Pokua has been very busy and has had takings of GH20,000. He has
attempted to draw up his own profit and loss statement shown below.
Naana Pokuas Pizza Bar

Profit and Loss Statement for six months
ending 30th June 2009
Sales 20,000
Cost of sales (1) 15,000
Gross Profit 5,000
Less Expenses
Sundry expenses (2) 350
Licence (3) 400
Light & Heat 80
Wages & Salaries (4) 1,000
1,830
Net Profit 3,170
Notes to the accounts
1. Cost of sales is made up of:
- GH5,000 for the ingredients (flour, buns, sauces etc.) and - GH10,000
which was paid for the vehicle. This is expected to last for four years before
replacement.
2. Sundry expenses include 300 for repairs to Naana Pokuas house.
3. The cost of a one-year licence to trade is GH400.
4. These relate to wages for part-time staff Naana Pokua has not drawn a
salary.
Required:
a) Redraft Naana Pokuas Income Statement for the six-month period to show his
net profit taking into account notes 1 to 4 above. Use straight-line
depreciation.
b) Draw up a statement of financial position at the end of the period.
82
Suggested solution:
A:
Naana Pokua
Redrafted Income Statement for the six month period
GH Comment
GH
Sales 20,000
Cost of Sales 5,000 See note 1
Gross Profit 15,000
Less Expenses
Sundry expenses 50 See note 2
Licence 200 See note 3
Light& Heat 80
Depreciation 1,250 See note 1
Wages& salaries 1,000 See note 4
2,580
Net Profit 12,420
Note 1: only items bought for resale are regarded as part of cost of sales.
Deprecation is 10,000/4 = 2500 per annum but only 6month in this income
statement
Note 2: only business expenses due to the business entity concept
Note 3: only 6month, implying the other half is prepayments
Note 4: no adjustments required
B:
Naana Pokua
Redrafted Statement of financial position as at the end the six month period
Assets GH Claims
GH
Non-current Long term
Van 10,000 Capital 12,420
Less Depreciation (1,250) Drawings (repairs) (300)
8,750 12,120
Loan
- from Naana Pokua (van purchase) 10,000
Current assets Current liabilities
Prepayment of licence 200 nil
Cash* 13,170
22,120 22,120
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Q1. You are the Chief Accountant of Kessben Leisure Ltd, a small company
operating in the leisure industry. You have drafted the final accounts for the year and
have sent them to the Managing Director for his approval. A few days later, you
receive the following memo:
Kessben Leisure Limited Internal Memorandum
From: Managing Director Date: 14th January

To: Chief Accountant
Subject: DRAFT ACCOUNTS
I have a number of queries on the draft accounts and would be grateful for your
response as soon as possible.
i) I note you have charged the GH6,400 we spent on re-surfacing the outdoor
hard tennis courts to repairs expenditure. The profit and loss account would
look somewhat healthier if we capitalised this expenditure and wrote it off
over future years.
ii) I am disturbed to see that you have charged depreciation on our freehold
premises. Since we acquired them from the Local Authority two years ago
they have doubled in value. Could we not revalue them and boost the profit
for the year?
iii) Equipment is being depreciated at 15% on cost. The replacement cost of the
majority of items in this category has risen by about 20% this year. I think it
would be appropriate therefore to increase the depreciation charge on these
items, to say 20%, in order to ensure we retain sufficient funds in the business
to replace these assets when the time comes.
iv) I have just had a meeting with the Sales Director and he has told me that the
Wizzo Supanets which we launched last year have really not been a success
and we will have to sell off the ones that were still in stock at the year-end,
probably at below cost price. What are the accounting implications of this?
v) Two of your staff were discussing the draft accounts yesterday. One of them
said that he had just received a late invoice from the chap we employed during
last year to paint the offices and that the amount was more than he had
expected. His colleague replied that she had already made an accrual and that
the difference was not material. What does this mean?
Required:
Prepare a memorandum reply to the points raised by the Managing Director
84
Q2. Using the answer in Q1 under practice questions in chapter 3 prepare the relevant
financial statements for Ophelia Opoku Appiah Limited.
Q3. Using the answer in Q2 under practice questions in chapter 3 prepare the relevant
financial statements for Maame Nyarko Limited.
Q4. Kwame Nkrumah, a carpenter, has the following trial balance as at 31 December 2013.
Debit Credit
GH GH
Work done 50,000
Purchases of materials 25,000
Opening stock of tools 650
Motor expenses 3,550
Debtors 1,000
Creditors 4,000
Cash at bank 3,600
Long-term loan 16,800
Building at cost 52,300
Motor car at cost 8,000
Computer at cost 6,300
Office equipment at cost 10,200
Business rates 1,300
Electricity 900
Interest on loan 1,600
Drawings 5,200
Telephone 1,200
Capital 50,000
120,800 120,800
You have the following additional information.

1. Closing stock of tools 4,500
2. Depreciation is to be written off the fixed assets as follows:
Buildings 3,000
Motor car 2,000
Computer 1,400
Office equipment 1,800
Required:
Prepare Kwame Nkrumahs trading profit and loss account for the year ended 31
December 2013 and the balance sheet as at 31 December 2013.
(Adapted from: Jones, M (2006) Accounting (2nd Edition) John Wiley & Sons,
Ltd, Chapter 6, Exercise 9)
85
UNIT 3: ACCOUNTING FOR NON-CURRENT ASSETS
SCOPE
This unit considers an introduction to accounting for non-current assets
CHAPTER 5: NON CURRENT ASSETS
Definition of non-current assets

Purpose of asset register
Ledger entries to record the acquisition of non-current assets.
Purpose of depreciation.
Straight-line and reducing balance methods of depreciation.
Depreciation expense and accumulated provision for depreciation are recorded
in the ledger accounts.
How depreciation is presented in the profit and loss accounts and balance
sheet.
Practise Questions
AIMS:
Accounting for non-current assets

After you have studied this chapter, you should be able to
Define fixed assets
Explain the functions and purpose of asset register
Explain the ledger entries to record the acquisition of fixed assets.
Outline the purpose of depreciation.
Explain the merits and demerits of straight-line and reducing balance methods
of depreciation and make necessary calculations.
Illustrate how depreciation expense and accumulated provision for
depreciation are recorded in the ledger accounts.
Illustrate how depreciation is presented in the profit and loss accounts and
balance sheet.
5.0 DESCRIPTION OF NON-CURRENT

ASSETS
Non-current assets possess the following features:
1. At the time of purchase are intended to remain in the business for more than
one accounting period (over one year). This suggests that they are not
acquired for resale.
2. They are used to generate income directly or indirectly for the business.
86
3. They are not liquid assets (not easily and quickly converted into cash)
compared to current assets. For this reason, they are kept in the business for
more than one accounting period.
4. They are either tangible or intangible. Tangible assets are those with a physical
identity, for example, buildings, furniture and fittings. Intangible assets are
assets without physical form. Examples might be brand names, trademarks,
expertise, patents, etc.
Current assets are intended to be held not more than one accounting period. Current assets
include inventory (stock), receivables (debtors), prepayments, cash and cash equivalents.
Activity 5.0 NON CURRENT ASSETS AND CURRENT ASSESTS

a. List your assets.
b. Classify the assets in a into current and non-current assets
c. Classify your non-current assets into tangible and intangible.
d. Is your wife or husband assets?
5.1 NON-CURRENT ASSET REGISTER

Non-Current Assets Register is use to record all non-current assets held by a firm, implying it
forms part of the internal control system of a firm. The details on such a register include but
not limited to: (1|) cost of the non-current asset, (2) date of purchase, (3) description of asset,
(4) serial/reference number, (5) Location of asset, (6) depreciation method, (7) expected
useful economic life, and (8) carrying value (Net book value).
5.2 RECOGNITION AND INITIAL

MEASUREMENT OF NON-CURRENT
ASSET
IAS 16 Property, Plant and Equipment outlines the accounting treatment for most types of
property, plant and equipment. Property, plant and equipment is initially measured at its cost,
subsequently measured either using a cost or revaluation model; or depreciated so that its
depreciable amount is allocated on a systematic basis over its useful life.
IAS 16 was reissued in December 2003 and applies to annual periods beginning on or after 1
January 2005.
The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and
equipment. The principal issues are the recognition of assets, the determination of their
carrying amounts, and the depreciation charges and impairment losses to be recognised in
relation to them.
IAS 16 does not apply to: (1) assets classified as held for sale in accordance with IFRS 5, (2)
exploration and evaluation assets (IFRS 6), (3) biological assets related to agricultural activity
(see IAS 41) or (4) mineral rights and mineral reserves such as oil, natural gas and similar
non-regenerative resources. The standard does apply to property, plant, and equipment used to
develop or maintain the last two categories of assets. [IAS 16.3]
87
5.2.1 RECOGNITION OF NON-CURRENT ASSETS
IAS 16.7 prescribes that items of property, plant, and equipment should be recognised as
assets when:
1. It is probable that the future economic benefits associated with the asset will
flow to the entity, and
2. The cost of the asset can be measured reliably.
This recognition principle is applied to all property, plant, and equipment costs at the time
they are incurred. These costs include costs incurred initially to acquire or construct an item
of property, plant and equipment and costs incurred subsequently to add to, replace part of, or
service it.
IAS 16 does not prescribe the unit of measure for recognition what constitutes an item of
property, plant, and equipment. [IAS 16.9] Note, however, that if the cost model is used (see
below) each part of an item of property, plant, and equipment with a cost that is significant in
relation to the total cost of the item must be depreciated separately. [IAS 16.43]
IAS 16 recognises that parts of some items of property, plant, and equipment may require
replacement at regular intervals. The carrying amount of an item of property, plant, and
equipment will include the cost of replacing the part of such an item when that cost is
incurred if the recognition criteria (future benefits and measurement reliability) are met. The
carrying amount of those parts that are replaced is derecognised in accordance with the
derecognition provisions of IAS 16.67-72. [IAS 16.13]
Also, continued operation of an item of property, plant, and equipment (for example, an
aircraft) may require regular major inspections for faults regardless of whether parts of the
item are replaced. When each major inspection is performed, its cost is recognised in the
carrying amount of the item of property, plant, and equipment as a replacement if the
recognition criteria are satisfied. If necessary, the estimated cost of a future similar inspection
may be used as an indication of what the cost of the existing inspection component was when
the item was acquired or constructed. [IAS 16.14]
5.2.2 INITIAL MEASUREMENT OF NON-CURRENT

ASSETS
An item of property, plant and equipment should initially be recorded at cost. [IAS 16.15]
Cost includes all costs necessary to bring the asset to working condition for its intended use.
This would include not only its original purchase price but also costs of site preparation,
delivery and handling, installation, related professional fees for architects and engineers, and
the estimated cost of dismantling and removing the asset and restoring the site (see IAS 37:
Provision, Contingent Liabilities and Contingent Assets) [IAS 16.16-17].
If payment for an item of property, plant, and equipment is deferred, interest at a market rate
must be recognised or imputed. [IAS 16.23] If an asset is acquired in exchange for another
asset (whether similar or dissimilar in nature), the cost will be measured at the fair value
88
unless (a) the exchange transaction lacks commercial substance or (b) the fair value of neither
the asset received nor the asset given up is reliably measurable. If the acquired item is not
measured at fair value, its cost is measured at the carrying amount of the asset given up. [IAS
16.24]
In short, the cost of a non-current asset is any amount incurred to acquire the asset and bring
it into working condition. It includes capital expenditure such as purchase price, delivery cost,
legal fees and subsequent expenditure which improves the asset. It, however, excludes
revenue expenditure such as repairs, renewals and repainting.
The double entry to record the purchase is:

Debit the non-current asset account (note: a separate account must be kept for each category
of non-current asset, e.g. Motor vehicle, Plant and machinery etc).
Credit the Bank/ Cash/ Supplier (if purchase by cheque, cash and on credit, respectively)
ACTIVITY 5.2.2A: COST OF NON-CURRENT ASSETS

Kwame Mireku commenced business providing shuttle services on 1st January 2013. In the
year to 31st December 2013 he incurred the following cost:
Expenditure GH
Office building 500,000
Legal fees associated with the purchase of office building 20,000
Cost of painting office 300
Toyota Bus 232,000
Number plates for the Bus 420
Delivery charge for Bus 360
Road license fee for the Bus 480
Drivers wages for 1st semester of operations 3,000
Blank shuttle receipts 450
What amount should be capitalized as Land and Building and Motor Vehicles?
SOLUTION TO ACTIVITY 5.2.2A: COST OF NON-CURRENT ASSETS

Land & Building Motor Vehicle
GH GH
Office premises 500,000
Legal fees 20,000
Toyota Bus 232,000
Number plates for the bus 420
Delivery charge for the bus 360
89
Total cost 520,000 232,780
Note: these are revenue expenditure and hence not considered as part of the cost of the
assets.
Road license fee for the Bus 480
Drivers wages for 1st semester of operations 3,000
Blank shuttle receipts 450
5.2.3 MEASUREMENT SUBSEQUENT TO INITIAL

RECOGNITION
IAS 16 permits two accounting models:
1. Cost model. The asset is carried at cost less accumulated depreciation

and impairment. [IAS 16.30]
2. Revaluation model. The asset is carried at a revalued amount, being

its fair value at the date of revaluation less subsequent depreciation and
impairment, provided that fair value can be measured reliably. [IAS
16.31]
The revaluation model
Under the revaluation model, revaluations should be carried out regularly, so that the carrying
amount of an asset does not differ materially from its fair value at the balance sheet date. [IAS
16.31]
If an item is revalued, the entire class of assets to which that asset belongs should be revalued
[IAS 16.36]. Revalued assets are depreciated in the same way as under the cost model (see
below).
If a revaluation results in an increase in value, it should be credited to other comprehensive

income and accumulated in equity under the heading "revaluation surplus" unless it represents
the reversal of a revaluation decrease of the same asset previously recognised as an expense,
in which case it should be recognised as income. [IAS 16.39]
A decrease arising as a result of a revaluation should be recognised as an expense to the

extent that it exceeds any amount previously credited to the revaluation surplus relating to the
same asset. [IAS 16.40]
When a revalued asset is disposed of, any revaluation surplus may be transferred directly to
retained earnings, or it may be left in equity under the heading revaluation surplus. The
transfer to retained earnings should not be made through the income statement (that is, no
"recycling" through profit or loss). [IAS 16.41]
90
5.3 DEPRECIATION OF NON-CURRENT
ASSETS
Depreciation is a systematic allocation of the cost or revaluation amount of non-current assets
over its useful economic life. This, in turn, reflects the cost of the non-current assets that has
been consumed during the period. In accordance matching concept, depreciation matches the
cost of using a non-current asset to the revenues generated by the asset over its useful life.
Thus, we record depreciation charge each year. The effect of depreciation is twofold. First,
reduce the value of the non-current assets in the balance sheet to reflect wear and tear, usage,
passage of time, technological obsolescence, depletion of the non-current the assets. Second,
we record the depreciation charge as an expense in the profit and loss account to match to the
revenue generated by the non-current asset.
5.4 METHODS OF DEPRECIATION

The depreciable amount (cost less residual value) should be allocated on a systematic basis
over the asset's useful life [IAS 16.50].The residual value and the useful life of an asset
should be reviewed at least at each financial year-end and, if expectations differ from
previous estimates, any change is accounted for prospectively as a change in estimate under
IAS 8. [IAS 16.51]
The depreciation method used should reflect the pattern in which the asset's economic
benefits are consumed by the entity [IAS 16.60]. The depreciation method should be
reviewed at least annually and, if the pattern of consumption of benefits has changed, the
depreciation method should be changed prospectively as a change in estimate under IAS 8.
[IAS 16.61]
Depreciation should be charged to the income statement, unless it is included in the carrying
amount of another asset [IAS 16.48].Depreciation begins when the asset is available for use
and continues until the asset is derecognised, even if it is idle. [IAS 16.55]
The most commonly used methods of depreciation as discussed earlier are straight-line
method, reducing balance method and sum of the years digits method, the analysis of which I
turn to.
5.4.1 The straight line method by formula is given as (Cost less Scrap Value)/Useful
life or a percentage multiply by the cost. Scrape value is the anticipated
disposal value of the asset at the end of its useful life. Economic Useful life
denotes the estimated number of years during which the business will enjoy
economic benefit from the non-current asset.
91
ACTIVITY 5.4.1 STRAIGHT LINE METHOD
Building Plant Vehicle
GH000 GH000 GH000
Cost of acquisition 1,600 1,200 800
Scrap value 60 nil 80
st st st
Date of purchase 1 January, 2012 1 July, 2012 1 October, 2012
% of Depreciation 10% 20% 25%
Useful economic 10years 5years 4years
life
Method of SLM SLM SLM
depreciation
Required:
a. What is the total depreciation charge for the year ended 31 December 2012, 2013 and
2014 (assume the entity charges full year depreciation on the year of purchase of a
non-current asset).
b. What is the total depreciation charge for the year ended 31 December 2012, 2013 and
2014 (assume the entity charges depreciation evenly on non-current assets):
5.4.2 Reducing balance method by formulae is a percentage multiply by the

carrying amount or net book value (NBV). Net Book Value is the original
cost of the non-current asset less accumulated depreciation on the non-
current asset to date.
ACTIVITY 5.4.2 REDUCING BALANCE METHOD

Building Plant Vehicle
GH000 GH000 GH000
Cost of acquisition 1,600 1,200 800
Scrap value 60 nil 80
st st st
Date of purchase 1 January, 2011 1 July, 2012 1 October, 2013
% of Depreciation 10% 20% 25%
Useful economic 10years 5years 4years
life
Method of RBM RBM RBM
depreciation
Required:
a. What is the total depreciation charge for the year ended 31 December 2011, 2012,
2013 (assume the entity charges full year depreciation on the year of purchase of a
non-current assets).
b. What is the total depreciation charge for the year ended 31 December 2011, 2012,
2013 (assume the entity charges depreciation evenly on non-current assets):
92
ACTIVITY 5.4.3A SUM OF THE YEARS DIGITS METHOD
The following information relates to a Van belonging to Akua Aprekuwaa Limited
Van cost GH40,000
Estimated Useful economic life 6years
Scrap value GH4,000
Required:
Calculate the yearly depreciable charge using:
a. Straight line method(SLM)
b. Reducing balance method(RBM); and
c. Sum of the years digits method
(adopted from Gyasi, K.(2013) Accounting for the non-accountant manager, Kwabotwe
Hill Publishers Accra, Ghana: Chapter 3, page 64-65)
Suggested solution
a): SLM
Annual depreciation charge = (Cost less Scrap value)/UEL
(40,000-4,000)/6
=6,000
Year 1: 6,000
Year 2: 6,000
Year 3: 6,000
Year 4: 6,000
Year 5: 6,000
Year 6: 6,000
b) :RBM
Formula 1 (nth root of scrape value/cost)
Where n denotes the life of the asset (in years)
1-(6 root 4,000/40,000)
1 - 0.68
0.319
32%
Cost 40,000
Depreciation year 1: 40,000*32% = 12,800
Depreciation year 2: (40,000-12,800)*32%=8,704
Depreciation year 3: (40,000-12,800-8,704)*32%= 5,918.72
Depreciation year 4: (40,000-12,800-8704-5,919)*32%=4024.64
Depreciation year 5: (40,000-12,800-8704-5919-4024.64)*32%=2736.76
Depreciation year 6: (40,000-12,800-8,704-5,919-4,024.64-
2,736.76)*32%=1860.99
c): Sum of years digits method
Year 1+2+3+4+5+6 = 21
Years reversed: 6 +5+4+3+2+1
Depreciation:
Year 1: 6/21*(40,000-4,000)=10,286
Year 2: 5/21* (40,000-4,000)=8,571
93
Year 3: 4/21*(40,000-4,000)=6,857
Year 4: 3/21*(40,000-4,000)=5,143
Year 5: 2/21*(40,000-4,000)=3,429
Year 6: 1/21*(40,000-4,000)=1,714
5.5 ACCOUNTING FOR DEPRECIATION

The accounting treatment remains the same, notwithstanding the depreciation method used to
calculate the depreciation charge. We debit the depreciation account and credit the
accumulated depreciation account with the depreciation charge for the year. The
depreciation account is a profit and loss account and therefore not cumulative. The
accumulated depreciation account is a balance sheet account and therefore is cumulative. The
depreciation will be transferred to the profit and loss account as an expense and the provision
for depreciation will be deducted from the cost of the asset in the balance sheet.
ACTIVITY 5.5 ACCOUNTING FOR DEPRECIATION

Building 1 Building 2 Vehicle1 Vehicle 2
GH000 GH000 GH000 GH000
Cost of 1,600 1,200 800 600
acquisition
Scrap value 60 Nil 80 Nil
Date of 1/1 2011 1/7/2012 1/10/2013 1/4/2014
purchase
% of 10% 5% 25% 20%
Depreciation
Useful 10years 20years 4years 5years
economic life
Method of SLM SLM RBM RBM
depreciation
Required:
a. What is the total depreciation charge for the year ended 31 December 2011, 2012,
2013 and 2014.
b. Building account for 2011, 2012, 2013 and 2014
c. Vehicle account for 2011, 2012, 2013 and 2014
d. The provision for depreciation building account for 2011, 2012, 2013 and 2014
e. The provision for depreciation vehicle account for 2011, 2012, 2013 and 2014
f. The building deprecation account for 2011, 2012, 2013 and 2014
g. The vehicle depreciation account for 2011, 2012, 2013 and 2014
h. The profit and loss account extracts for 2011, 2012, 2013 and 2014
i. The balance sheet extracts for 2011, 2012, 2013 and 2014.
94
5.6 RECOVERABILITY OF THE CARRYING
AMOUNT
IAS 36 suggests impairment testing and, if necessary, recognition for property, plant, and
equipment. An item of property, plant, or equipment shall not be carried at more than
recoverable amount. Recoverable amount is the higher of an asset's fair value less costs to sell
and its value in use.
Any claim for compensation from third parties for impairment is included in profit or loss
when the claim becomes receivable. [IAS 16.65]
5.7 DERECOGNITION (RETIREMENTS

AND DISPOSALS)
An asset should be removed from the balance sheet on disposal or when it is withdrawn from
use and no future economic benefits are expected from its disposal. The gain or loss on
disposal is the difference between the proceeds and the carrying amount and should be
recognised in the income statement. [IAS 16.67-71]
If an entity rents some assets and then ceases to rent them, the assets should be transferred to
inventories at their carrying amounts as they become held for sale in the ordinary course of
business. [IAS 16.68A]
5.8 DISCLOSURE
For each class of property, plant, and equipment, disclose: [IAS 16.73]
1) basis for measuring carrying amount
2) depreciation method(s) used
3) useful lives or depreciation rates
4) gross carrying amount and accumulated depreciation and impairment losses
5) reconciliation of the carrying amount at the beginning and the end of the
period, showing:
a) additions
b) disposals
c) acquisitions through business combinations
d) revaluation increases or decreases
e) impairment losses
f) reversals of impairment losses
g) depreciation
h) net foreign exchange differences on translation
i) other movements
In addition, the entity should disclose: [IAS 16.74]

1) restrictions on title
2) expenditures to construct property, plant, and equipment during the period
3) contractual commitments to acquire property, plant, and equipment
95
4) compensation from third parties for items of property, plant, and equipment
that were impaired, lost or given up that is included in profit or loss.
If property, plant, and equipment is stated at revalued amounts, certain additional disclosures
are required: [IAS 16.77]
1) the effective date of the revaluation
2) whether an independent valuer was involved
3) the methods and significant assumptions used in estimating fair values
4) the extent to which fair values were determined directly by reference to
observable prices in an active market or recent market transactions on arm's
length terms or were estimated using other valuation techniques
5) for each revalued class of property, the carrying amount that would have been
recognised had the assets been carried under the cost model
6) the revaluation surplus, including changes during the period and any
restrictions on the distribution of the balance to shareholders
REAL WORLD 5.5

An intangible asset according to IAS 38 is an identifiable non-monetary asset without
physical substance. The asset must be:
a. Controlled by the entity as a result of an event in the past and
b. Something from which the entity expects future economic benefits to flow.
RESEARCH EXPENDITURE: Research expenditure by definition does not meet the

above criteria for recognition as an intangible asset under IAS 38. This is because, at the
research stage of a project, it cannot be certain that the future economic benefits will
probably flow to the entity from the project. There is too much uncertainty about the
likely success or otherwise of the project. Research cost should therefore be written off
as an expense in the statement of comprehensive income in the period in which they are
incurred.
DEVELOPMENT EXPENDITURE: Development costs may qualify for recognition as

an intangible asset provided that the following strict criteria can be demonstrated:
a. The technical feasibility of completing the intangible assets so that it will be
available for use or sale.
b. Its intention to complete the intangible asset and use it or sell it.
c. Its ability to use or sell the intangible assets.
d. How the intangible asset will generate probable future economic benefits.
e. Its ability to measure the expenditure attributable to the intangible assets
reliably.
In contrast to research costs, development costs are incurred at a later stage in a
project, and the probability of success is more apparent. Hence when such recognition
criteria are met development expenditure should be capitalized in the statement of
financial position of the reporting entity at the cost or the revalued amount less
accumulated amortization and accumulated impairment losses.
96
If the economic useful life of the development expenditure can be ascertained it should
be amortized over the useful life of the assets, if the useful life is indefinite according to
IAS 36 the asset should not be amortized but tested for impairment losses at least
annually.
According to IAS 38-Intangible Assets; all research costs are to be expensed.

Development costs are capitalized only after technical and commercial feasibility of the
asset for sale or use have been established. This means that the entity must intend and
be able to complete the intangible asset and either use it or sell it and be able to
demonstrate how the asset will generate future economic benefits.
A research and development project acquired in a business combination is recognized
as an asset at cost, even if a component is research. Subsequent expenditure on that
project is accounted for as any other research and development cost (expensed except to
the extent that the expenditure satisfies the criteria in IAS 38 for recognizing such
expenditure as an intangible asset).
Having outlined the provisions of IAS 38, it is important to assess the treatment of
research and development costs in the financial statements of financial institutions.
ZENITH BANK: It is the companys policy to recognize Intangible assets including

development expenditure at cost less accumulated amortization and accumulated
impairment losses. Subsequent expenditure on these assets is capitalized only when it
increases the future economic benefits embodied in the specific asset to which it relates.
All other expenditure is expensed as incurred and that includes research costs.
Intangible assets such as development expenditure with indefinite useful lives are not
amortized but assessed for possible impairment losses. Amortization is recognized in the
income statement on a straight-line basis over the estimated useful life of the assets,
from the date that it is available for use. Amortization methods, useful lives and residual
values are reviewed at each financial year-end and adjusted if appropriate.
Zenith bank recorded profit before tax of GHS 40,266,158 and GHS 26,024,680 in 2012
and 2011 respectively after charging depreciation and amortization to the tune of GHS
5,157,357 and GHS 5,247,734 in those years respectively. This represent a very
significant portion of the banks operating costs. Going through the notes to the
financial statements, it can be seen that research costs did not feature in the accounts
suggesting that the bank places little or no importance on research costs as opposed to
other operating expenses.
The carrying amount of intangible assets was GHS 183,648 and GHS 111,030 in 2012
and 2011 respectively. Leasehold property was GHS 956,582 and GHS 978,382 in 2012
and 2011 respectively. Property and equipment in 2012 and 2011 were also GHS
13,470,903 and GHS 11,724,496 respectively. It is worth mentioning that development
costs also featured less significantly in the companys account, as all the intangible
assets were computer software.
CALBANK: All the Intangible assets including development expenditure that meet the
recognition criteria as outlined in IAS 38 are stated at cost less accumulated
amortization and accumulated impairment losses. The policy of the company is to use
the cost based model. All other expenditure including research cost is expensed as
97
incurred. Amortization is recognized in the income statement on a straight-line basis
over the estimated useful life of the asset, from the date that it is available for use.
The bank recorded a net operating income of GHS 58,246,000 and GHS 111,779,000 in
2011 and 2012 respectively and also recorded depreciation & amortization charges to
the tune of GHS 2,473,000 and GHS 3,068,000 in 2011 and 2012 respectively. From the
above figures it is evident that amortization charges represent a significant portion of
the banks operating costs that goes to affect the profit of the company. Examining the
notes that accompanied the accounts it is evident that research costs were non-existent
in the accounts for both years.
Looking through the statement of financial positions, the carrying amount of intangible
assets was GHS 662,000 and GHS 847,000 in 2011 and 2012 respectively. Property plant
and equipment in 2012 and 2011 are GHS 34,548,000 and GHS 28,762,000 respectively.
Again intangible assets represent a large portion as opposed to the expenditure on the
companys other non-current assets. All the intangible assets were computer software.
ECOBANK GHANA PLC: As part of the companys policies intangible assets that
meets the recognition criteria of IAS 38 are capitalized. All intangible assets that have
an indefinite useful life are not subjected to amortization but are tested annually for
impairment. Assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. For the
purposes of assessing impairment, assets are grouped at the lowest levels for which
there are separately identifiable cash flows (cash generating units). The impairment test
also can be performed on a single asset when the fair value less cost to sell or the value
in use can be determined reliably. However, intangible assets with an indefinite useful
life are amortized over the useful life of the asset.
EcoBank Plc recorded an operating profit of GHS 102,619,000 and GHS 196,185,000 in
2011 and 2012 respectively and charged depreciation and amortization to the tune of
GHS 2,473,000 and GHS 3,068,000 in those years respectively. Even though
amortization charges resulting from capitalizing expenditures on intangible assets
featured prominently, research costs were either insignificant or non-existent in the
accounts in the two years.
The carrying amount of intangible assets was GHS 6,107,000 and GHS 4,017,000 in
2011 and 2012 respectively. Property and equipment was GHS 57,503,000 and GHS
45,774,000 in 2012 and 2011 respectively. Again intangible assets represented a
significant component of the assets, but all were computer software.
In conclusion, Research & Development expenditure are relatively minor in the

financial statements of the three banks. Research & Development expenses are usually
the highest for industrial, technological, healthcare and pharmaceutical firms. Some
companies reinvest a significant portion of their profits back into R&D, as they see this
as an investment in their continued growth. It can also be inferred from the data above
on the three commercial banks that investment in intangible assets represents a
significant portion of the companies assets. Amortization and impairment charges are
significant to other operating expenses. However, research and development costs were
very insignificant in the accounts.
98
5.6 PRACTISE QUESTIONS
Q1: On 1st January, Ms Pokua set up a business called Abena Fit-Start, and Ms Nyarko set up
a business called Akosua Get-Fit. Both businesses were developing and retailing fitness
products. During the following year, they undertook identical transactions, as follows:
(a) Purchased equipment on 1st January for GH100,000. The equipment has
an estimated useful life of 5 years, after which it will have an estimated
residual value of 10,000.
(b) Incurred research and development expenditure of 50,000.
(c) Purchased inventory (stock) as follows:

1 January 2,000 units at 50 each
1 May 2,000 units at 100 each.
(d) Made sales of the above items as follows:

30 September 2,000 units at 150 each.
(e) Paid overheads and expenses of 50,000.
The accounting policies adopted by the two businesses are as follows:
Abena Fit-Start Akosua Get-Fit

Depreciation Straight line Reducing balance
(Rate approximates to
37%)
Research and development Amortised over 10 years Written off as incurred
Stock valuation FIFO LIFO
Required:
i) Prepare income statements (profit & loss accounts) for Abena Fit-start and
Akosua Get-fit for their first year of trading.
ii) Comment on the statements you have prepared and discuss the effects of the
differences in accounting treatment on the balance sheets of the two
businesses.
(Adapted from: Arnold, J, Hope, T, Southworth, A and Kirkham, L (1994) Financial

Accounting (2nd Edition) Prentice Hall, Exercise 7.6)
Q2 Joseph Arthur has the following details of his non-current assets.
99
Cost Accumulated depreciation as
at 31 December 2009
GH GH
Premises 102,000 8,000
Plant 65,000 6,500
Motor Vehicle 8,000 4,000
Equipment 9,000 2,700
He charges depreciation at 2% per annum on cost of premises, 10% per annum on cost of
plant, 25% per annum on cost of motor vehicle and 15% per annum on the cost of equipment.
Required:
Prepare the appropriate extracts for
a. The statement of financial position as at 31 December 2009
b. The income statement for year ended 31 December 2010 and for the balance
sheet as at 31 December 2010.
(Adapted from: Jones, M (2006) Accounting (2nd Edition) John Wiley & Sons, Ltd,
Chapter 6, Exercise 12)
Q3. Maame Akosua Nyarko provided you with the following information.
GH000 GH000 GH000 GH000
Cost of 1,600 1,200 800 600
acquisition
Scrap value 60 Nil 80 Nil
Date of 1/1 2011 1/7/2012 1/10/2013 1/4/2014
purchase
economic life
100
depreciation
Required:
a) What is the total depreciation charge for the year ended 31 December 2011, 2012,
2013 and 2014 (assume the entity charges full year depreciation on the year of
purchase of a non-current asset).
b) Building account for 2011, 2012, 2013 and 2014
c) Vehicle account for 2011, 2012, 2013 and 2014
d) The provision for depreciation building account for 2011, 2012, 2013 and 2014
e) The provision for depreciation vehicle account for 2011, 2012, 2013 and 2014
f) The building deprecation account for 2011, 2012, 2013 and 2014
g) The vehicle depreciation account for 2011, 2012, 2013 and 2014
h) The profit and loss account extracts for 2011, 2012, 2013 and 2014
i) The balance sheet extracts for 2011, 2012, 2013 and 2014.
Q4. Maame Akosua Nyarko provided you with the following information.
GHm GHm GHm GHm
Cost of 16 12 8 6
acquisition
Date of 1/1 2010 1/7/2010 1/10/2010 1/4/2011
purchase
economic life
depreciation
101
Required:
a) What is the total depreciation charge for the year ended 31 December 2010, 2011
and 2012 (assume the entity charges full year depreciation on the year of purchase
of a non-current asset).
b) Building account for 2010, 2011 and 2012
c) Vehicle account for 2010, 2011 and 2012
d) The provision for depreciation building account for 2010, 2011 and 2012
e) The provision for depreciation vehicle account for 2010, 2011 and 2012
f) The building deprecation account for 2010, 2011 and 2012
g) The vehicle depreciation account for 2011, 2012, 2013 and 2012
h) The profit and loss account extracts for 2010, 2011 and 2012
i) The balance sheet extracts for 2010, 2011 and 2012
j) Redraft a, b, c, d, e, f, g, h and i (assume the entity charges depreciation evenly)
Q5. Mama Esther, a cement seller, extracted the following trial balance from her
books at the close of business on 31st December 2013.
Debit Credit
GH GH
Turnover 5,000 400,000
Purchases 350,000 6,200
Inventory 1/1/2013 100,000
Provision for doubtful debts 800
Wages and salaries 30,000
Rates 6,000
102
Telephone 1,000
Fixtures and fittings at cost 40,000
Vehicle at cost 30,000
Receivables and Payables 9800 7000
Bad Debts 200
Capital 179,000
Drawings 18,000
Bank 3,000
593,000 593,000
Notes:
Closing inventory at 31st December 2013 GH120,000.
Accrued wages GH5,000.
Rates prepaid GH500.
The provision for doubtful debts to be increased to 10% of debtors.
Telephone account outstanding GH220.
Depreciate fittings at 10% per annum, and Vehicle at 20% per annum, on cost.
UNIT 4: ACCOUNTING FOR PARTNERSHIP
SCOPE
This unit considers an introduction to partnership
CHAPTER 6: INTRODUCTION TO
PARTNERSHIP
Nature of a partnership
Distinctive accounting features of partnership
Prepare the accounts of partnerships
103
Distinction between limited partners and general partners
The main features of a partnership agreement
Ledger accounts and financial statements for a partnership
Practise Questions
AIMS:
To construct an income statements of a partnership business

Explain what a partnership is and how it differs from a joint venture or sole
proprietor
Outline the distinctive accounting features of partnership
Demonstrate how to prepare the accounts of partnerships
Distinguish between limited partners and general partners
Describe the main features of a partnership agreement
Explain what will happen if no agreement exists on how to share profits or
losses
Draw up the ledger accounts and financial statements for a partnership
6.0 THE NATURE OF A PARTNERSHIP

Partnership is defined by the Incorporated Private Partnership Act 1962, (Act 152) as
the association of two or more individuals carrying on business jointly for the purpose
of making profit. In Ghana, the IPPA 1962 requires that the formation of a partnership
provided there is a permanent and/or long term relationship between two or more
individuals working together to earn a profit. They do not have to work in the same
location. Thus, a partnership is formed by individuals not persons, implying that a
partnership firm or a company may not legally join with any other individual to form a
partnership. In Ghana, a partnership firm is an entity legally separate and distinct from
its owners, implying that firm can sue its owners and vice versa. As well the firm can
buy and own property and behave or exercise powers as a natural person. This said,
every partner is jointly (with the other partners) and singularly responsible for all the
debts and obligations of the firm incurred in the currency of his being a partner of the
firm. Each general partner (i.e. not limited partners) must pay their share of any debts
that the partnership cannot pay.For this reason, they maintain one set of accounting
records and share the profits and losses. Specifically, the partnership firms are
expected to keep proper books of accounts including trading and profit and loss
accounts, accounts of their interest such as capital and current accounts, and a balance
sheet. Every partner has the right of access to the books of the firm. Partners shall also
stand in position of utmost trust towards each other. This, in turn, suggests that the
partners, including limited partner, must obey the law as given in the IPPA Act
1962.There should be a minimum of 2 and a maximum of 20 partners, with some
exceptions.
A limited partnership contains one or more limited partners but with at least one
general partner and must be registered with the Registrar of Companies. Unlike
general partners, limited partners are not liable for any debts above the level of capital
104
they invested. They are also not allowed to retrieve the capital they invested. Finally,
they cannot make management decisions.
6.1 PARTNERSHIP AGREEMENTS

IPPA Act 1962 recommends a written agreement drawn up by a lawyer or accountant
to avoid problems later on. The agreement should include:
1) The initial and subsequent capital to be contributed by each partner.
2) The profit or loss sharing ratio
3) The rate of interest paid on capital
4) The rate of interest charged on drawings
5) Salaries to be paid
6) Provisions for admitting new partners
7) The processes for the exit of a partner
However, where there is no partnership agreement, the IPPA Act 1963 directs the
situation and states that:
1) Profits or losses are to be shared equally
2) The partners are expected to contribute equal amounts of capital
3) The firm shall reimburse partners for expenses and personal liabilities incurred
for the benefit of the firm.
4) There is no interest allowed on capital or drawings.
5) Salaries are not allowed despite a partners involvement in the management of
the firm.
6) Every partner is expected to take part in the management of the business.
7) Any interest payable on capital shall be considered only after the net profit has
been determined i.e. interest shall not be charged before ascertaining the net
profit
8) Additional capital invested may receive an interest of 5%.
9) All the partners should agree to any introduction of a new partner, and the new
partner should agree, to become a partner.
10) A majority in the number of partners shall resolve differences on ordinary
matters, but the nature of the firms business must not be changed without the
agreement of all the partners.
11) The Act also provides that the books of the firm shall be kept at the place of
business of the firm, or the principal place of business of the firm.
ACTIVITY 6.1: DRAFT A PARTNERSHIP AGREEMENT

In a group of four, draft a partnership agreement for a proposed partnership firm you
intend to form after graduation.
ACITIVITY 6.1A: MERITS AND DEMERITS OF PARTNERSHIP
In a group of three, list three merits and demerits associated with a partnership firm
Suggested solution:
Merits include:
Capital is contributed between two or more people
105
Better decisions can be taken
Losses are shared among partners
Demerits are:
Delays in decision making
Profits are shared between two or more partners
Death of a partner dissolves the partnership
6.2 ACCOUNTING ASPECTS OF

PARTNERSHIP
The accounting aspect of partnership accounts is heavily dependent on the dual concept. This
said, there are two accounts worth discussing: Capital accounts and Current accounts.
First, a partnerships firm may opt for fixed capital accounts plus current accounts or
fluctuating capital accounts inclusive of current accounts.
Turning to fixed capital accounts, the capital account for each partner contains the figure of
initial and subsequent capital introduced by the partners. Put differently, the profits, interest
on capital and salaries that the partner may receive are credited to, and the drawings and
interest on drawings are debited to, a separate current account. Thus, a credit or favourable
balance on the current account at the end of each financial year shows the amount of undrawn
profits.
Turning to fluctuating capital account, the balance on a fluctuating capital account

will change each year. Here, the distribution of profits will be credited, and the
drawings and interest on drawings will be debited to the capital account rather than
the current account.
All other final accounts (e.g. income statement) remain unchanged save the statement
of financial position. Here, the statement of financial position in addition to all others
discussed in chapter two shows what has happened during the year in terms of the
share of profits, drawings, interest on capital and interest on drawings. The trading,
Profit and loss account for a partnership, however, is the same as that of a sole trader.
The Appropriation account is an extra statement in which the profit from the income
statement is apportioned between the partners.
ACTIVITY 6.2A: AKI AND PAWPAW

Aki and Pawpaw are entitled to 5% interest on capital and share profits in the ratio of
three-fifths and two-fifths, respectively.
Aki invested GH40,000 capital and Pawpaw invested GH120,000 capital.
Pawpaw receives a salary of GH30,000.
Aki withdrawn cash of GH30,000 and Pawpaw GH52,000.
Aki is to be charged GH1,000 interest on drawings and Pawpaw GH2,000.
Net profits amounted to GH100,000.
106
You are required to prepare:
a. profit and loss appropriation account
b. What is each partners share of profit
c. Capital account
d. Current account
e. Fluctuating capital account
f. The statement of financial position using either c & d or e (use f for study
group discussion)
Suggested Solution Activity 6.2A

A. AKI AND PAWPAW PROFIT AND LOSS APPROPRIATION ACCOUNT
GH GH GH
Net Profit 100,000
Add: interest on
drawings
Aki 1,000
Pawpaw 2,000
3,000
103,000
Less:
Salary to 30,000
107
Pawpaw
Interest on
capital:
Aki (5/100*40,000) 2,000
Pawpaw (5/100*120,000) 6,000
8,000
(38,000)
65,000
Balance of Profit
shared
Aki 3/5*65,000 39,000
Pawpaw 2/5*65,000 26,000
65,000
B. EACH PARTNERS SHARE OF PROFIT(100,000) IS

AKI PAWPA
W

Balance of profit 39,000 26,000
Interest on capital 2,000 6,000
Salary Nil 30,000
41,000 62,000
Less interest on 1000 2,000
drawings
40,000 60,000
C: CAPITAL ACCOUNT
AKI PAWPA AKI PAW
W

1/1/13 40,000 120
Bank
D. CURRENT ACCOUNTS
AKI PAWPA AKI PAW
W
108
Dec 2013 Dec
2013
31. 30,000 52,000 Dec 31 30
Drawings salary
31. 1,000 2,000 31. 2,000 6
Interest Interest
on on
drawings capital
31. 10,000 8,000 31. 39,000 26
balance share of
c/d profit
41,000 62,000 41,000 62
E: FLUCTUATING CAPITAL ACCOUNT

AKI PAWPA AKI PAW
W
Dec 2013 Dec
2013
1/1/13 40,000 120
Bank
31. 30,000 52,000 Dec 31 30
Drawings salary
31. 1,000 2,000 31. 2,000 6
Interest Interest
on on
drawings capital
31. 50,000 128,000 31. 39,000 26
balance share of
c/d profit
81,000 182,000 81,000 182
1/1/2014 50,000 128
Bal b/d

Q1. Kofi and Ama are in partnership making and selling pies. The trial balance of
their business at 30th June 2012 was:
GH GH
Bad debts 4,700
Rent and rates 70,000
Motor expenses 34,800
Discount received 50,900
Motor Vehicle-cost 65,500
Accumulated depreciation 31,156
109
Cash at bank 934
Drawings-Kofi 27,000
Drawings-Ama 30,000
Inventory 6,000
Fixtures and Fittings-cost 54,000
Accumulated depreciation 27,000
Sundry expenses 29,560
Sales 314,000
Payables 19,600
Receivables 32,000
Purchases 192,000
Current account-Kofi 15,310
Current account-Ama 18,528
Capital account-Kofi 70,000
Capital account- Ama 40,000
586,494 586,494
They provide the following further information which is not reflected in the trial
balance.
Stock held at the year end cost 9,000.
Fixtures and fittings have not been depreciated; the applicable rate is 10% on
cost.
Prepayments at the end of the year were 5,000 in respect of rates.
Kofi paid 26,000 to the business account as a loan
Ama is awarded a salary of 15,000.
Interest on capital is provided at 8% per annum.
The balance of profits is shared equally.
You are required to prepare the trading, profit and loss account, appropriation of profit
account, partners current account and balance sheet as at 30th June 2012.
(Adopted from Appiah-kubi lecture materials unpublished)
Q2. Using the data in Q1 above, redraft the appropriation of profit account, partners
current account and statement of financial position as at 30th June 2012 (in all cases
assume there is no partnership agreement).
Q3. Using the data in Q1 above, prepare a fluctuating capital account for Q1 and Q2.
UNIT 5: ACCOUNTING FOR LIMITED LIABILITY COMPANIES
SCOPE
This unit considers an introduction to company accounts
CHAPTER 7: ACCOUNTING FOR LIMITED

COMPANIES
Nature of limited companies
110
Distinctive accounting features of limited companies
Prepare the accounts of limited companies
Distinction between listed and non-listed companies
AIMS:
To construct an income statements of a limited liability company

Explain what a limited company is and how it differs from a partnership or
sole proprietor
Outline the distinctive accounting features of limited companies
Demonstrate how to prepare the accounts of limited companies
Distinguish between public and private companies
7.0 INTRODUCTION
The three most common types of business enterprise are sole traders, partnerships and public
corporations. The need for limited companies is inevitable due to growth in the size of
businesses, and separation of ownership and control. Table 7.0 presents a snapshot of the
main differences of the sole traders, partnerships and public corporations.
Table 7.0 Sole Traders, Partnership, and Limited Companies Compared

FEATURE SOLE PARTNERSHIP LIMITED
TRADERS COMPANIES
Business
(i) Owners Sole traders Partners Shareholders
(ii) Run Sole traders Partners Directors
company
(iii) Statutory No specific IPPA, Act 152 of Companies
accounti act 1963 Code 179 of
ng 1963
legislatio Taxation Laws
n Security Laws
(iv) Number of One (1) 2-20 (but certain Private 1-50
owners exceptions such Public 2
as accountants, upwards
solicitors)
(v) Liability Unlimited Unlimited, save Limited-
for limited If shareholders
partners have paid in
full for their
shares, their
liability is
limited to what
they have
already paid
111
for those
shares. If a
company loses
all its assets,
all those
shareholders
can lose is
their shares.
They cannot
be forced to
pay anything
more in
respect of the
companys
losses.
Shareholders
who have only
partly paid for
their shares
can be forced
to pay the
balance owing
on the shares,
but nothing
else.
Shareholders
are therefore
said to have
limited
liability and
this is why
companies are
known as
limited
liability or,
more usually,
simply
limited
companies.
By addressing
the need for
investors to
have limited
risk of
nancial loss,
the existence
of limited
liability
112
encourages
individuals to
invest in these
companies and
makes it
possible to
have both a
large number
of owners and
a large amount
of capital
invested in the
company.
(vi) Capital Capital Capital The capital of
contribution contribution from a limited
partners company is
divided into
shares. To
become a
member of a
limited
company, or a
shareholder, a
person must
buy one or
more of the
shares.
Accounting
(i) main Tax Tax authorities, Tax authorities
external authorities, banks and banks,
uses of banks shareholders
accounts for public
companies
(ii) main Trading and Trading, profit Trading, profit
financial profit and and loss and and loss
statemen loss appropriation (statement of
ts account and account and comprehensive
balance balance sheet income),
sheet balance sheet
and cash flow
statement
(iii) main - Appropriation Appropriation
differenc account shares account has
es in out profit dividends and
profit taxation
and loss
account
113
from
sole
trader
(iv) main - None Companies,

differenc when in
es in net groups, may
assets have goodwill.
from They are also
sole likely to have
trader other
intangible
assets such as
patents or
brands. In
current
liabilities,
there are
proposed
dividends (for
non-listed
companies
only) and
taxation
payable.
(v) Main - Capital and Capital
differenc current accounts essentially
es in record divided into
owners share capital
capital and reserves
from
sole
trader
(Adopted Jones, M 2006, Accounting 2nd Edition, chapter 7, page 149)
ACTIVITY 7.0A: LIMITED LIABILITY

The fact that shareholders can limit their losses to that which they have paid, or have
agreed to pay, for their shares are of great practical importance to potential
shareholders. Can you think of any practical benefit to a private-sector economy, in
general, of this ability of shareholders to limit losses?
Suggested Solution
Business is a risky venture-in some cases very risky. People will usually be happier to
invest money when they know the limit of their liability. If investors are given
liability, new businesses are more likely to be formed and existing ones are likely to
find it easier to raise more finance. This is good for the private-sector economy and
may ultimately lead to the generation of greater wealth for society as a whole.
114
ACTIVITY 7.1A LIMITED LIABILITY
In a group of 6, describe the six main features (i.e. Legal nature, Perpetual life,
Limited liability, Legal safeguards, Taxation, and Transferring share ownership) of
limited liability company.
Suggested solution
1. Legal nature:-A limited company is said to possess a separate legal identity
from that of its shareholders. Put simply, this means that a company is not seen
as being exactly the same as its shareholders. For instance, a company can sue
one or more of its shareholders, and similarly, a shareholder can sue the
company. This would not be the case if the company and its shareholders were
exactly the same thing, as one cannot sue oneself. This concept is often
referred to as the veil of incorporation. :
2. (continue with point 2: perpetual life to point 6: (transferring ownership)
7.1 PUBLIC AND PRIVATE LIMITED

LIABILITY COMPANIES
A public company is dened as one which fulls the following conditions: Its memorandum
(a document that describes the company) states that it is a public company, and that it has
registered as such. There are two types of company in Ghana: the private limited company
and the public limited company.
Table 7.1: Features of Private Limited Companies (Ltds) and Public Limited Companies
(plcs) in Ghana
Feature Private Limited Public Limited
Company Company
Names Ltd after company plc after company
name name
Number of 1 upwards 2 to unlimited
shareholders
Share trading Restricted Unrestricted
Stock market listing No Usually
Size Usually small to Usually medium to
medium enterprises large enterprises
115
Accounts Follow GAAP Follow International
Accounting
Standards
Essential difference Usually privately Large corporations
controlled and owned usually trading on the
stock market
SOUND BITE 7.1: ACCOUNTABILITY TO SHARE HOLDERS

The managers in public limited companies are accountable to the shareholders, in
theory. In practice, however, many commentators doubt this accountability
7.2 DISTINCTIVE ACCOUNTING

FEATURES
The core of the profit and loss account of sole traders, partnerships and limited companies is
the same. However, there are some important differences. In the case of a sole trader and
partnerships the only important difference is that for partnerships the profit is divided (this is
formally known as appropriated) between the partners. For listed limited companies in
Ghana, IAS 1 presents standardized format. Unquoted limited companies in Ghana, however,
are not required to publish accounts. The Ghanaian unquoted limited companies are required
to comply with provisions in International Financial Reporting Standards. Table 7.2 presents
the income statement for sole trader, partnership, non-listed companies and limited
companies.
Table 7.2 Difference between Profit and loss Accounts of Sole Traders, Partnerships and
Limited Companies
Sole Traders: Partnerships: Non-Listed Listed
Income Income Limited Companies:
Statement Statement and Companies: Income
Appropriation Income Statement
Account Statement
GH GH GH GH
Sales Sales Sales Sales
400,000 400,000 400,000 400,000
Cost of Sales Cost of Sales ( Cost of Sales Cost of Sales
(200,000) 200,000) (200,000) (200,000)
Gross Profit Gross Profit Gross Profit Gross Profit
200,000 200,000 200,000 200,000
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Other Income Other Income Other Income Other Income
20,000 20,000 20,000 20,000
180,000 180,000 180,000 180,000

Expenses Expenses Expenses Expenses
(120,000) (120,000) (120,000) (120,000)
Net Profit Net Profit Net Profit before Tax Net Profit before Tax
60,000 60,000 60,000 60,000
Taxation Taxation
Partner A (20,000) (20,000)
30,000 Profit after Tax Profit after Tax
Partner B 40,000 40,000
30,000 Dividends
(25,000)
60,000 Retained Profit
15,000
There are several possible variations but the examples in Table 7.2 are simplified for
comparison purposes. Note that for listed companies, dividends are not recorded in the
income statement. The special nature of limited companies leads to several distinctive
differences between the accounts of limited companies and those of sole traders and
partnerships, both in the profit and loss account (income statement) and in the balance sheet.
Specifically, there are four special expenses may appear in the income statement of limited
companies but not partnership nor sole trader. These are: directors remuneration, auditors
fees, interest and taxation.
7.3 GLOSSARY OF LIMITED COMPANIES.

7.3.1 Types of Companies
A company may either be public or private limited company. Public Limited Liability
Company can issue shares to the general public to raise more capital. Public Limited Liability
Companies normally have the letters Plc after their names.
Private Limited Liability Company, however, are not allowed to issue shares to the general
public, implying that the shares are traded among family and friends. Accordingly, a private
limited company who wishes to issue shares to the public must change to a public limited
liability company. Private limited liability companies normally have the letters Ltd after
their names. It has limited membership as compare to public companies. This
notwithstanding, shareholders of both private and public companies liabilities are limited to
the amount invested in share capital plus the amount outstanding on their share or the amount
they have agreed to pay in the event of liquidation. Put differently, a company limited by
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guarantee is an incorporated firm in which the liability of members is limited by the
memorandum of association to the amounts that they have agreed to pay in the event of
liquidation. As well, a company limited by shares is an incorporated firm in which the
liability of members is limited by the memorandum of association to the amounts paid or
unpaid for shares.
Statutory Company is an organisation form by an act of parliament. There are legal

requirement place on companies to make certain financial information regarding their
activities public.
Listing or Quoted Company has a listing agreement with a stock exchanged and whose
shares therefore have a traded in the stock market. Unlisted or Unquoted companies
shares, however, are not on an official stock exchange list. This suggests that these unquoted
companies are not required to satisfy the standard set for listing, publishing of accounts, in
particular.
Dividend: shareholders or members of a limited company obtain their reward in the form of a
share of the prots, known as a dividend. The directors decide first on the amount of prots
which are placed to reserves and second, propose the payment of a certain amount of
dividend. The dividend is expressed as a percentage of the value of shares. It is worthy to note
that, the decision to propose a dividend is based on availability of profit, whereas the
dividend is a percentage of the value of the share.
7.3.2 TYPES OF SHARES

There are two main types of shares namely: preference and ordinary shares. Holders of
preference shares collect an agreed percentage rate of dividend prior to disbursement to
ordinary shareholders. Put differently, holders of ordinary shares are residual claimants,
implying that ordinary shareholders receive the remainder of the total prots available for
dividends. Here, there is no ceiling to the amounts of dividends ordinary shareholders can
have.
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ACTIVITY 7.3: TYPES OF COMPANIES
Make a list of five examples of the following companies:
a. Listed
b. Unlisted
c. Statutory
d. Companies limited by shares
e. Companies limited by guarantee
ACTIVITY 7.3.1A: ILLUSTRATION OF DIVIDEND
a. A dividend of 10% in AngloGold plc on 5000,000 ordinary shares of GH 1 each is:
Answer:
10/100* (GH1*5,000, 000) = GH500,000.
b. As well, a dividend of 6 per cent in ECOBANK Transnational plc on 2,000,000 ordinary shares of
GH 2 each is:
Answer:
6/100* (GH2*2,000,000) = GH 240,000.
c. A dividend of 10% in AngloGold plc on 5000,000 ordinary shares of GH 0.50 each is:
Answer:
10/100* (GH0.50*5,000, 000) = GH250,000.
d. As well, a dividend of 6 per cent in ECOBANK Transnational plc on 2,000,000 ordinary shares of
GH 1 each is:
Answer:
6/100* (GH1*2,000,000) = GH120,000.
ACTIVITY 7.3.2A: PREFERENCE AND ORDINARY SHARES
What is the dividend payable given the following data?
Atwima Kwanwoma Rural Bank Limited had 500,000 5 per cent preference shares of GH 1 each and 2,000,000
ordinary shares of GH 1 each. The Profit After Interest and Tax for years 2007, 2008, 2009, 2010 and 2011 are
GH65,000, GH40,500, GH63,500, GH28,500 and GH87,500
Answer
Year 2007 2008 2009 2010 2011
GH GH GH GH GH
PBIT 65,000, 40,500, 63,500, 28,500 87,500
Dividend
Preference (25,000) (25,000) (25,000) (25,000) (25,000)
shares
Ordinary (40,000) (15,500) (38,500) (13,500) (62,500)
shares
Percentage % % % % %
Preference 5 5 5 5 5
shares
Ordinary 2 1 2 1 3
shares 119
7.3.3 TYPES OF PREFERENCE SHARES
There are two main types of preference shares. These are non-cumulative and cumulative
preference shares Holders of non-cumulative preference shares obtain a dividend up to an
agreed percentage each year but forfeits any shortfall in periods of insufficient profit. Thus,
where the amount paid to non-cumulative shareholders is less than the maximum agreed
amount, the shortfall is lost by the shareholder. In short, the deficit is not carried forward and
funded in the upcoming year.
On the contrary, unpaid or deficit dividend of holders of cumulative preference shares are
carried forward and paid in a subsequent year prior to any other distribution of dividend.
Thus, arrears of preference dividends will have to be paid before the both cumulative and
non-cumulative preference shareholders as well as ordinary shareholders receive any
distribution of profit. Put simply, both cumulative and non-cumulative preference shares
receive an agreed maximum percentage dividend save the latter forfeits deficits.
ACTIVITY 7.3.3 PREFERENCE OR ORDINARY SHARES

Why do you think an investor might opt for preference shares but not ordinary shares in any Ghanaian listed
company of your choice?
ACTIVITY 7.3.3A NON CUMULATIVE PREFERENCE SHARES
A company has 500,000 GH 1 ordinary shares and 100,000 5 per cent non-cumulative preference shares of GH
1 each. The prots available for dividends are: years 2006 to 2010 are GH 145,000, GH 2,000, GH 44,000
GH 118,000 and GH 264,000. Assume the directors have decided not to plough back any prots, and thus, pay
out all profit in dividends.
Task
What are the amounts paid to each class of shareholder?
Answer:
2006 2007 2008 2009 2010
GH GH GH GH GH
PAIT** 145,000 2,000 44,000 118,000 264,000
Dividends:
Preference (5,000) (2,000) (5,000) (5,000) (5,000)
shares
Ordinary (140,000) nil (39,000) (113,000) (259,000)
shares
ACTIVITY 7.3.3B: CUMULATIVE PREFERENCE SHARES

Assume that the preference shares in Activity 7.3.3A had been cumulative. The dividends would have been:
Answer:
2006 2007 2008 2009 2010
GH GH GH GH GH
120
PAIT** 145,000 2,000 44,000 118,000 264,000
Dividends:
Preference (5,000) (2,000) (8,000) (5,000) (5,000)
shares
Ordinary (140,000) nil (36,000) (113,000) (259,000)
shares
**PAIT means profit after interest and tax
7.3.4 SHARE CAPITAL TERMINOLOGY

Authorised share capital (registered or nominal capital) denotes the total of the share capital
which the company is allowed to issue to shareholders.
Issued or allotted share capital is the total of the share capital actually issued to members.
Called-up capital is the amount asked for on all the issued shares is known as the called-up
capital.
Uncalled capital is the amount which is to be received in future relating to issued share
capital, but which has not yet been asked for.
Calls in arrears represent the amount for which payment has been called or asked for but has
not yet been paid by members.
Paid-up capital is the amount of share capital which has been paid for by shareholders.
ACTIVITY 7.3.4A: SHARE CAPITAL JARGON

Jose Enterprises Ltd was formed with the legal right to issue 1 million shares of GH
1 each.
The company has actually issued 750,000 shares. None of the shares has yet been fully
paid up. So far, the company has made calls of 80pesewas (GH 0.80) per share. All
the calls have been paid by shareholders except for GH 200 owing from one
shareholder
Calculate the following:

(a) Authorised capital
(b) Issued share capital
(c) Called-up share capital
(d) Calls in arrears
(e) Paid-up share capital
Answer
(a)Authorised or nominal share capital is: GH 1 million.
(b) Issued share capital is: GH 750,000.
(c) Called-up share capital is: 750,000 GH0.80 = GH 600,000.
(d) Calls in arrears amounted to: GH 200
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(e) Paid-up share capital is: (c) GH 600,000 less (d) GH200 = GH 599,800.
7.3.5: BONUS SHARES

Bonus shares are free shares issued to members without their having to pay anything for
them. The reserves (e.g. accumulated prots) held in the reserves account and shown in the
balance sheet) are used for the purpose.
ACTIVITY 7.3.5A: ILLUSTRATION OF BONUS SHARES

Hammer Limited has GH 20,000 of issued share capital and GH 12,000 reserves.
The CEO and the directors decide to reward the existing shareholders with a bonus
issue of 1 for 4 (i.e. 1 bonus share for every 4 shares already held)
Task:
What is the effect of the bonus shares issue on the following:
a. Cash at bank
b. Cash in hand
c. Reserves
d. Share capital
Answer:
a. the bonus issue would amount to GH 5,000 but with no increase or decrease
cash at bank.
b. There will also be no increase or decrease in cash in hand. This is because
bonus shares do not involve cash injection from existing/old shareholders.
c. The reserves account is debited by 5,000 and thus, becomes 7,000, implying
a decrease of 5,000.
d. The share capital is credited with the bonus shares of 5,000 and thus,
becomes GH 25,000.
ACTIVITY 7.3.6A: MOTIVATION FOR BONUS SHARES
In a group of four, kindly think of at least three reasons why directors make a bonus
issue.
Answer:
Share price: lower the value of each share without reducing the shareholders
collective or individual wealth(same as share splitting)
Enhance shareholder confidence-a feel-good factor
Enhance lenders confidence
Note: by law directors can distribute revenue reserves but not share capital as
dividend, implying that a transfer from the reserves account to the share capital
account is an indication of the directors long term orientation.
.
7.3.6 DEBENTURES JARGONS
Debenture also called Loan Stock or Loan Capital is used when a limited company receives
money on loan, and issue a debenture certicate to the lender.
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Debentures interest: interest will be paid to the holder of the debenture, the rate of interest
being shown on the certicate. Unlike dividend, debenture interest is paid whether prots or
loss are made.
Debentures-types: a debenture may be either redeemable or irredeemable. Redeemable

debentures are repayable at or by a particular date. Irredeemable or perpetual debentures,
however, are normally repayable only when the company is ofcially terminated.
As well debentures (i.e. redeemable or irredeemable) may be either secured/mortgage or

naked/simple debenture. Holders of secured debentures have prior right to control a specific
assets under any circumstances Holders of naked or simple debentures, however, have no
prior right to control the assets under any circumstances.
ACTIVITY 7.3.6 SECURED OR NAKED DEBENTURE

Hazard Limited is considering buying secured debenture but nor simple debenture
from a newly established firm in Kumasi. Comment on this, going into detail as much
as possible
(Hint: think about Mr Saloman.)
7.4 FINANCIAL STATEMENTS OF

LIMITED LIABILITY COMPANIES
IAS 1 Presentation of Financial Statements sets out the overall requirements for financial
statements, including how they should be structured, the minimum requirements for their
content and overriding concepts such as going concern, the accrual basis of accounting and
the current/non-current distinction. The standard requires a complete set of financial
statements to comprise a statement of financial position, a statement of profit or loss and
other comprehensive income, a statement of changes in equity and a statement of cash flows.
IAS 1 was reissued in September 2007 and applies to annual periods beginning on or after 1
January 2009.
7.4.0 Objective of IAS 1

The objective of IAS 1 (2007) is to prescribe the basis for presentation of general purpose
financial statements, to ensure comparability both with the entity's financial statements of
previous periods and with the financial statements of other entities. IAS 1 sets out the overall
requirements for the presentation of financial statements, guidelines for their structure and
minimum requirements for their content. [IAS 1.1] Standards for recognising, measuring, and
disclosing specific transactions are addressed in other Standards and Interpretations. [IAS 1.3]
7.4.1 Scope of IAS 1

IAS 1 applies to all general purpose financial statements based on International Financial
Reporting Standards. [IAS 1.2]. General purpose financial statements are those intended to
serve users who are not in a position to require financial reports tailored to their particular
information needs. [IAS 1.7]
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7.4.2 Objective of financial statements
The objective of general purpose financial statements is to provide information about the
financial position, financial performance, and cash flows of an entity that is useful to a wide
range of users in making economic decisions. To meet that objective, financial statements
provide information about an entity's assets, liabilities, equity, income and expenses (e.g.
including gains and losses), contributions by and distributions to owners and cash flows [IAS
1.9]. These information, along with other information in the notes, assists users of financial
statements in predicting the entity's future cash flows and, in particular, their timing and
certainty.
7.4.3 Components of financial statements

A complete set of financial statements should include: [IAS 1.10]
1. a statement of financial position (balance sheet) at the end of the period
2. a statement of comprehensive income for the period (or an income statement
and a statement of comprehensive income)
3. a statement of changes in equity for the period
4. a statement of cash flows for the period
5. notes, comprising a summary of accounting policies and other explanatory
notes
When an entity applies an accounting policy retrospectively or makes a retrospective

restatement of items in its financial statements, or when it reclassifies items in its financial
statements, it must also present a statement of financial position (balance sheet) as at the
beginning of the earliest comparative period. An entity may use titles for the statements other
than those stated above.
Reports that are presented outside of the financial statements including financial reviews by
management, environmental reports, and value added statements are outside the scope of
IFRSs. [IAS 1.14]
7.4.4 Fair presentation and compliance with IFRSs

The financial statements must "present fairly" the financial position, financial performance
and cash flows of an entity. Fair presentation requires the faithful representation of the effects
of transactions, other events, and conditions in accordance with the definitions and
recognition criteria for assets, liabilities, income and expenses set out in the Framework. The
application of IFRSs, with additional disclosure when necessary, is presumed to result in
financial statements that achieve a fair presentation. [IAS 1.15]
IAS 1 requires that an entity whose financial statements comply with IFRSs make an explicit
and unreserved statement of such compliance in the notes. Financial statements shall not be
described as complying with IFRSs unless they comply with all the requirements of IFRSs
(including Interpretations). [IAS 1.16]. For example, inappropriate accounting policies are not
rectified either by disclosure of the accounting policies used or by notes or explanatory
material. [IAS 1.16]
124
IAS 1 acknowledges that, in extremely rare circumstances, management may conclude that
compliance with an IFRS requirement would be so misleading that it would conflict with the
objective of financial statements set out in the Framework. In such a case, the entity is
required to depart from the IFRS requirement, with detailed disclosure of the nature, reasons,
and impact of the departure. [IAS 1.19-20]
Going concern: -an entity preparing IFRS financial statements is presumed to be a going
concern. If management has significant concerns about the entity's ability to continue as a
going concern, the uncertainties must be disclosed. If management concludes that the entity is
not a going concern, the financial statements should not be prepared on a going concern basis,
in which case IAS 1 requires a series of disclosures. [IAS 1.25]
Accrual basis of accounting: IAS 1 requires that an entity prepare its financial statements,
except for cash flow information, using the accrual basis of accounting. [IAS 1.27]
Consistency of presentation: the presentation and classification of items in the financial

statements shall be retained from one period to the next unless a change is justified either by a
change in circumstances or a requirement of a new IFRS. [IAS 1.45]
Materiality and aggregation: each material class of similar items must be presented
separately in the financial statements. Dissimilar items may be aggregated only if they are
individually immaterial. [IAS 1.29]
Offsetting: assets and liabilities, and income and expenses, may not be offset unless required
or permitted by an IFRS. [IAS 1.32]
Comparative information: IAS 1 requires that comparative information shall be disclosed in

respect of the previous period for all amounts reported in the financial statements, both face
of financial statements and notes, unless another Standard requires otherwise. [IAS 1.38]. If
comparative amounts are changed or reclassified, various disclosures are required. [IAS 1.41]
Structure and content of financial statements in general: the financial statement must
clearly identify the following: [IAS 1.50]
1. the financial statements
2. the reporting enterprise
3. whether the statements are for the enterprise or for a group
4. the date or period covered
5. the presentation currency
6. the level of precision (thousands, millions, etc.)
Reporting period: There is a presumption that financial statements will be prepared at least
annually. If the annual reporting period changes and financial statements are prepared for a
different period, the entity must disclose the reason for the change and a warning about
problems of comparability. [IAS 1.36]
125
7.4.5 Statement of Financial Position (Balance Sheet)
An entity must normally present a classified statement of financial position, separating
current and non-current assets and liabilities. Only if a presentation based on liquidity
provides information that is reliable and more relevant may the current/non-current split be
omitted. [IAS 1.60] In either case, if an asset (liability) category combines amounts that will
be received (settled) after 12 months with assets (liabilities) that will be received (settled)
within 12 months, note disclosure is required that separates the longer-term amounts from the
12-month amounts. [IAS 1.61]
Current assets are cash; cash equivalent; assets held for collection, sale, or consumption
within the entity's normal operating cycle; or assets held for trading within the next 12
months. All other assets are non-current. [IAS 1.66]
Current liabilities are those expected to be settled within the entity's normal operating cycle or
due within 12 months, or those held for trading, or those for which the entity does not have an
unconditional right to defer payment beyond 12 months. Other liabilities are non-current [IAS
1.69]. Long-term debt expected to be refinanced under an existing loan facility can be
classified as non-current at the entitys discretion, even if due within 12 months. [IAS 1.73]
If a liability has become payable on demand because an entity has breached an undertaking
under a long-term loan agreement on or before the reporting date, the liability is current, even
if the lender has agreed, after the reporting date and before the authorisation of the financial
statements for issue, not to demand payment as a consequence of the breach. [IAS 1.74]
However, the liability is classified as non-current if the lender agreed by the reporting date to
provide a period of grace ending at least 12 months after the end of the reporting period,
within which the entity can rectify the breach and during which the lender cannot demand
immediate repayment. [IAS 1.75]
Minimum items on the face of the statement of financial position [IAS 1.54]
(a) property, plant and equipment
(b) investment property
(c) intangible assets
(d) financial assets (excluding amounts shown under (e), (h), and (i))
(e) investments accounted for using the equity method
(f) biological assets
(g) Inventories
(h) trade and other receivables
(i) cash and cash equivalents
(j) assets held for sale
(k) trade and other payables
(l) Provisions
(m) financial liabilities (excluding amounts shown under (k) and (l))
(n) liabilities and assets for current tax, as defined in IAS 12
(o) deferred tax liabilities and deferred tax assets, as defined in IAS 12
126
(p) liabilities included in disposal groups
(q) non-controlling interests, presented within equity and
(r) issued capital and reserves attributable to owners of the parent
Additional line items may be needed to fairly present the entity's financial position. [IAS
1.54]
IAS 1 does not prescribe the format of the balance sheet. Assets can be presented current then
non-current, or vice versa, and liabilities and equity can be presented current then non-current
then equity, or vice versa. A net asset presentation (assets minus liabilities) is allowed. The
long-term financing approach used in UK and elsewhere fixed assets + current assets - short
term payables = long-term debt plus equity is also acceptable.
Regarding issued share capital and reserves, the following disclosures are required: [IAS
1.79]
1. numbers of shares authorised, issued and fully paid, and issued but not fully
paid
2. par value
3. reconciliation of shares outstanding at the beginning and the end of the period
4. description of rights, preferences, and restrictions
5. treasury shares, including shares held by subsidiaries and associates
6. shares reserved for issuance under options and contracts
7. a description of the nature and purpose of each reserve within equity
7.4.6 Statement of Comprehensive Income

Comprehensive income for a period includes profit or loss for that period plus other
comprehensive income recognised in that period. As a result of the 2003 revision to IAS 1,
the Standard is now using 'profit or loss' rather than 'net profit or loss' as the descriptive term
for the bottom line of the income statement.
All items of income and expense recognised in a period must be included in profit or loss
unless a Standard or an Interpretation requires otherwise. [IAS 1.88] Some IFRSs require or
permit that some components to be excluded from profit or loss and instead to be included in
other comprehensive income. [IAS 1.89]
The components of other comprehensive income include:
1. changes in revaluation surplus (IAS 16 and IAS 38)
2. actuarial gains and losses on defined benefit plans recognised in accordance
with IAS 19
3. gains and losses arising from translating the financial statements of a foreign
operation (IAS 21)
4. gains and losses on re-measuring available-for-sale financial assets (IAS 39)
5. the effective portion of gains and losses on hedging instruments in a cash flow
hedge (IAS 39).
6. an entity has a choice of presenting:
7. a single statement of comprehensive income or
8. two statements:
a. an income statement displaying components of profit or loss and
127
b. a statement of comprehensive income that begins with profit or loss
(bottom line of the income statement) and displays components of
other comprehensive income [IAS 1.81]
Minimum items on the face of the statement of comprehensive income should

include: [IAS 1.82]
1. revenue
2. finance costs
3. share of the profit or loss of associates and joint ventures accounted for using
the equity method
4. tax expense
5. a single amount comprising the total of (i) the post-tax profit or loss of
discontinued operations and (ii) the post-tax gain or loss recognised on the
disposal of the assets or disposal group(s) constituting the discontinued
operation
6. profit or loss
7. each component of other comprehensive income classified by nature
8. share of the other comprehensive income of associates and joint ventures
accounted for using the equity method
9. total comprehensive income
10. The following items must also be disclosed in the statement of comprehensive
income as allocations for the period: [IAS 1.83]
11. profit or loss for the period attributable to non-controlling interests and owners
of the parent
12. total comprehensive income attributable to non-controlling interests and
owners of the parent
Additional line items may be needed to fairly present the entity's results of operations.
[IAS 1.85]
No items may be presented in the statement of comprehensive income (or in the
income statement, if separately presented) or in the notes as 'extraordinary items'. [IAS
1.87]
Certain items must be disclosed separately either in the statement of comprehensive
income or in the notes, if material, including: [IAS 1.98]
1. write-downs of inventories to net realisable value or of property, plant and
equipment to recoverable amount, as well as reversals of such write-downs
2. restructurings of the activities of an entity and reversals of any provisions for
the costs of restructuring
3. disposals of items of property, plant and equipment
4. disposals of investments
5. discontinuing operations
6. litigation settlements
7. other reversals of provisions
Expenses recognised in profit or loss should be analysed either by nature (raw
materials, staffing costs, depreciation, etc.) or by function (cost of sales, selling,
administrative, etc). [IAS 1.99] If an entity categorises by function, then additional
information on the nature of expenses at a minimum depreciation, amortisation and
employee benefits expense must be disclosed. [IAS 1.104]
128
Analysis of Expenses: The first form of analysis is the nature of expense method.
An entity aggregates expenses within profit or loss according to their nature (for
example, depreciation, purchases of materials, transport costs, employee benefits and
advertising costs), and does not reallocate them among functions within the entity.
This method may be simple to apply because no allocations of expenses to functional
classifications are necessary. An example of a classification using the nature of
expense method is as follows:
Revenue XX
Other Income XX
Changes in inventories of finished XX
goods and work in progress
Raw materials and consumables used XX
Employee benefits expenses XX
Depreciation and amortisation XX
expense
Other expenses XX
Total expenses XX
Profit before tax XX
The second form of analysis is the function of expense or cost of sales method and
classifies expenses according to their function as part of cost of sales or, for example,
the costs of distribution or administrative activities. At a minimum, an entity discloses
its cost of sales under this method separately from other expenses. This method can
provide more relevant information to users than the classification of expenses by
nature, but allocating costs to functions may require arbitrary allocations and involve
considerable judgement. An example of a classification using the function of expense
method is as follows:
Revenue X
Cost of sales X
Gross profit X
Other income X
Distribution costs X
Administration expenses X
Other expense X
Profit before tax X
An entity classifying expenses by function shall disclose additional information on the

nature of expenses, including depreciation and amortisation expense and employee
benefits expense.
129
The choice between the function of expense method and the nature of expense method
depends on historical and industry factors and the nature of the entity. Both methods
provide an indication of those costs that might vary, directly or indirectly, with the
level of sales or production of the entity. Because each method of presentation has
merit for different types of entities, this Standard requires management to select the
presentation that is reliable and more relevant. However, because information on the
nature of expenses is useful in predicting future cash flows, additional disclosure is
required when the function of expense classification is used.
7.4.7 Statement of Cash Flows

Rather than setting out separate standards for presenting the cash flow statement, IAS
1.111 refers to IAS 7 Statement of Cash Flows. Chapter 8 of this material considers
the analysis of IAS 7 Statement of Cash Flows.
7.4.8 Statement of Changes in Equity

IAS 1 requires an entity to present a statement of changes in equity as a separate
component of the financial statements. The statement must show: [IAS 1.106]
1. total comprehensive income for the period, showing separately amounts
attributable to owners of the parent and to non-controlling interests
2. the effects of retrospective application, when applicable, for each component
3. reconciliations between the carrying amounts at the beginning and the end of
the period for each component of equity, separately disclosing:
a. profit or loss
b. each item of other comprehensive income
c. transactions with owners, showing separately contributions by and
distributions to owners and changes in ownership interests in
subsidiaries that do not result in a loss of control.
The following amounts may also be presented on the face of the statement of changes
in equity, or they may be presented in the notes: [IAS 1.107]
1. amount of dividends recognised as distributions, and
2. the related amount per share
7.4.9 Notes to the financial statements

The notes must: [IAS 1.112]
1. present information about the basis of preparation of the financial statements
and the specific accounting policies used
2. disclose any information required by IFRSs that is not presented elsewhere in
the financial statements and
3. provide additional information that is not presented elsewhere in the financial
statements but is relevant to an understanding of any of them
Notes should be cross-referenced from the face of the financial statements to the
relevant note. [IAS 1.113]. IAS 1.114 suggests that the notes should normally be
presented in the following order:
1. a statement of compliance with IFRSs
130
2. a summary of significant accounting policies applied, including: [IAS 1.117]
a. the measurement basis (or bases) used in preparing the financial
statements
b. the other accounting policies used that are relevant to an understanding
of the financial statements
3. supporting information for items presented on the face of the statement of
financial position (balance sheet), statement of comprehensive income (and
income statement, if presented), statement of changes in equity and statement
of cash flows, in the order in which each statement and each line item is
presented
4. other disclosures, including:
a. contingent liabilities (see IAS 37) and unrecognised contractual

commitments
b. non-financial disclosures, such as the entity's financial risk

management objectives and policies (see IFRS 7)
Disclosure of judgements: New in the 2003 revision to IAS 1, an entity must

disclose, in the summary of significant accounting policies or other notes, the
judgements, apart from those involving estimations, that management has made in the
process of applying the entity's accounting policies that have the most significant
effect on the amounts recognised in the financial statements. [IAS 1.122]
Examples cited in IAS 1.123 include management's judgements in determining:

1. whether financial assets are held-to-maturity investments
2. when substantially all the significant risks and rewards of ownership of
financial assets and lease assets are transferred to other entities
3. whether, in substance, particular sales of goods are financing arrangements
and therefore do not give rise to revenue; and
4. whether the substance of the relationship between the entity and a special
purpose entity indicates control
Disclosure of key sources of estimation uncertainty: Also new in the 2003 revision
to IAS 1, an entity must disclose, in the notes, information about the key assumptions
concerning the future, and other key sources of estimation uncertainty at the end of the
reporting period, that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial year. [IAS 1.125]
These disclosures do not involve disclosing budgets or forecasts. [IAS 1.130]
The following other note disclosures are required by IAS 1.126 if not disclosed
elsewhere in information published with the financial statements:
1. domicile and legal form of the entity
2. country of incorporation
3. address of registered office or principal place of business
4. description of the entity's operations and principal activities
5. if it is part of a group, the name of its parent and the ultimate parent of the
group
131
6. if it is a limited life entity, information regarding the length of the life
7.4.10 Other disclosures

Disclosures about dividends: in addition to the distributions information in the
statement of changes in equity (see above), the following must be disclosed in the
notes: [IAS 1.137] " the amount of dividends proposed or declared before the financial
statements were authorised for issue but not recognised as a distribution to owners
during the period, and the related amount per share and " the amount of any
cumulative preference dividends not recognised.
Capital disclosures: an entity should disclose information about its objectives,

policies and processes for managing capital. [IAS 1.134] To comply with this, the
disclosures include: [IAS 1.135]
1. qualitative information about the entity's objectives, policies and processes for
managing capital, including>
a. description of capital it manages
b. nature of external capital requirements, if any
c. how it is meeting its objectives
2. quantitative data about what the entity regards as capital
3. changes from one period to another
4. whether the entity has complied with any external capital requirements and
5. if it has not complied, the consequences of such non-compliance.
Disclosures about puttable financial instruments: IAS 1.136A requires the

following additional disclosures if an entity has a puttable instrument that is classified
as an equity instrument:
1. summary quantitative data about the amount classified as equity
2. the entity's objectives, policies and processes for managing its obligation to
repurchase or redeem the instruments when required to do so by the instrument
holders, including any changes from the previous period
3. the expected cash outflow on redemption or repurchase of that class of
financial instruments and
4. information about how the expected cash outflow on redemption or repurchase
was determined
132
SOUND BITE 7.5 :INCOME STATEMENT OF LIMITED COMPANIES
1. Income Statement for both private and public companies are drawn up in exactly
the same way.
2. The trading account of a limited company is no different from that of a sole trader
or a partnership.
3. However, some differences may be found in the prot and loss account (e.g.
directors remuneration and debenture interest, audit fees).
SOUND BITE 7.6: ADDITIONAL FINANCIAL STATEMENTS

1. Statement of comprehensive income extends the conventional income statement to
include certain gains and losses that affect shareholders equity -presented either in
the form of a single statement or as two separate statements (Income Statement
&Statement of Comprehensive Income).
2. Income statement considers realised gains as well as both realised and unrealised
losses
3. Statement of comprehensive income considers both realised and unrealised gains as
well as both realised and unrealised losses
SOUND BITE 7.7 OVERVIEW OF STATEMENT OF COMPREHENSIVE

INCOME
Sales (1)
XXX
Less: Cost of Sales (2)
XXX
Gross Profit (3) = (1) - (2)
XXX
Add other income (4)
XXX
Less expenses (5, 6&7):
Administration expenses(5) XXX
Distribution expenses(6) XXX
Other expenses(7) XXX
XXX
Operating profit (8) = (3)+(4)-(5,6&7)
XX
Interest: (10)-(9)
Add Interest receivable (9) XX
Less Interest Payable (10) XX
XX
Profit before Tax (11) = (8) {(10) (9) }
XX
OTHER COMPREHENSIVE INCOME (15) = (12+13-14)
133
Revaluation of PPE (12)
XX
Foreign currency translation differences for foreign operations (13)
XX
LESS Tax on other comprehensive income (14)
XX
Other Comprehensive Income for the Year, Net Of Tax (15)
XX
TOTAL COMPREHENSIVE INCOME
XX
SOUND BITE 7.8:

STATEMENT OF COMPREHENSIVE INCOME IN TWO SEPARATE PARTS
Part 1: Income Statement (from revenue to profit for the year)
Part 2: The Statement of Comprehensive Income (from profit for the year to total
comprehensive income)
Example
You are to draw up the income statement for the year ending 31st December 2013, and a
balance sheet at that date from the following trial balance and details of Mata limited.
GH GH
Bank 8,100
Debtors 321, 219
Creditors 237,516
Stock at 31st December 290, 114
Equipment at cost 320,000
st
Profit and loss accounts as at 31 December 12 136,204
General reserve 120,000
Foreign exchange reserve 20,000
Authorised and issued share capital 800,000
Purchases 810,613
Sales 1,606,086
Carriage inwards 2,390
Carriage outwards 13,410
Salaries 384,500
Business rates 14,800
Office expenses 2,360
Provision for depreciation at 31st Dec 12:
Building 80,000
Equipment 96,000
Directors remuneration 119,200 0
134
3,095,806 3,095,806
Notes at 31st December 2013.
Stock, GH 317,426
Business rates owing GH1,700; Office expenses accrued GH245
Dividend of 15% proposed
Transfer to reserves: General GH70,000; Foreign exchange GH30,000
Depreciation on cost: Buildings 5%; Equipment 15%.
Corporation tax is 10%
(Source: Appiah-Kubi unpublished lecture material)
Answer
Mata Limited
Trading and Profit and Loss accounts for the year ended 31st 2013
GH GH
Sales 1,606,086
Less cost of sales
Opening stock 290,114
Purchases 810,613
1,100,727
Carriage inwards 2,390
1,103,117
Less closing stock 317,426
785,691
Gross Profit 820,395
Less expense
Carriage outwards 13,400

Business rates (14,800 +1,700) 16,500
Office expenses (2,360+245) 2,605
Salaries 384,500
Depreciation:
Buildings 40,000
Equipment 48,000
Directors remuneration 119,200
633,315
Operating profit before tax 187,080
Less corporation tax (10%* 187,080) 18,708
Operating profit after tax 168,372
Add profit and loss balance b/f 136,204
304,576
Less appropriation
135
Dividend (15% * 800,000) 120,000
General reserve 70,000
Foreign exchange reserve 30,000
220,000
Retained profit (Profit and loss balance as at 31st Dec 13) 84,576
Mata Limited
Balance sheet as at 31st December 2013
Fixed Assets Cost Depreciation NBV

GH GH GH
Buildings 800,000 120,000 680,000

Equipment 320,000 144,000 176,000
1,120,000 264,000 856,000
Current Assets
Stock 317,426
Debtors 321,219
Bank 8,100
646,745
Current liabilities
Creditors 237,516
Proposed dividend 120,000
Accrued (1,700+245) 1,945
Taxation 18,708
378,169
Net current assets 268,576
1,124,576
Financed by: GH
Authorised and issued share capital 800,000

Retained profit (Profit and loss balance as at 31st Dec 13) 84,576
General reserve (120,000+70,000) 190,000
Foreign exchange reserve (20,000+30,000) 50,000
1,124,576
136
Q1. Presented below is a draft set of financial statements for Maafia Limited.
Maafia Limited
Income statement for the year ended 30 June 2013
000 000
Revenue 1,850
Cost of sales (1,040)
Gross profit 810
Less expenses:
Depreciation (220)
Other administrative (375)
cost
(595)
PBIT 215
Interest payable (35)
Profit before taxation 180
Taxation (60)
Profit after taxation 120
Maafia Limited
Balance Sheet as at 30 June 2013
Cost Depreciation Carrying
value
000 000 000
Non-current assets
Land&Buildings 800 (112) 688
Equipment 650 (367) 283
Vehicle 102 (53) 49
1,552 (532) 1020
Current assets
Inventories 950
Receivables 420
Cash 16
1,386
Less Current
liabilities
Trade payables (361)
Other payables (117)
137
Taxation (60)
(538)
Net current assets 848
Less: Non-current
liabilities
Secured 10% Debt (700)
1,168
Equity Ordinary 800
shares of GH0.50,
fully paid
Reserves at 1 July 248
2012
Profit for the year 120
368
1,168
The following additional information is available:

1 Purchase invoices for goods received on 29 June 2013 amounting to GH23,000
have not been included. This means that the cost of sales figure in the income
statement has been understated.
1 A motor vehicle costing 8,000 with depreciation amounting to GH5,000 was
sold on 30 June 2013 for GH2,100, paid by cheque. This transaction has not
been included in the companys records.
2 No depreciation on vehicles has been charged. The annual rate is 20 per cent of
cost at the year end.
3 A sale on credit for GH16,000 made on 1 July 2013 has been included in the
financial statements in error. The cost of sales figure is correct in respect of this
item.
4 A half-yearly payment of interest on the secured loan due on 30 June 2013 has
not been paid.
5 The tax charge should be 30 per cent of the reported profit before taxation.
Assume that it is payable, in full, shortly after the year-end.
Required:
Prepare a revised set of financial statements incorporating the additional information
in 16 above. Note: Work to the nearest GH 1,000.
(Adopted from Atril et al (2006) Accounting and Finance for Non-specialist,
Exercise 4.4 page 136-137)
138
Q2. Rosemary Limited operates a small chain of retail shops that sell high-quality teas and
coffees. Approximately half of sales are on credit. Abbreviated and unaudited financial
statements are given below:
Rosemary Limited
Income statement for the year ended 31 March 2013
000 000
Revenue 12,080
Gross profit 5,798
Less expenses:
Labour costs (2,658)
Depreciation (625)
Other operating costs (1,003)
(4,286)
PBIT 1,512
Interest payable (66)
Profit before taxation 1,446
Taxation (434)
Profit after taxation 1,012
Dividend paid (300)
Retained profit brought 756
forward
Retained profit carried 1,468
forward
Rosemary Limited
Balance Sheet as at 31 March 2013
Cost Depreciation Carrying
value
000 000 000
Non-current assets
Equipment 2,728
Current assets
Inventories 1,583
Receivables 996
Cash 26
139
2,605
Less Current
liabilities
Trade payables (1,118)
Other payables (417)
Taxation (434)
Bank overdraft (596)
(2,565)
Net current assets 40
Less: Non-current
liabilities
Secured 10% Debt (300)
(2012)
2,468
Equity Ordinary 1,000
shares of
GH0.50, fully
paid
Reserves at 1 July 248
2012
Retained Profit 1,468
2,468
Since the unaudited financial statements for Rosemary Limited were prepared, the
following information has become available:
1 An additional 74,000 of depreciation should have been charged on fixtures and
fittings.
1 Invoices for credit sales on 31 March 2013 amounting to 34,000 have not been
included; cost of sales is not affected.
2 Bad debts should be provided at a level of 2 per cent of receivables at the year
end.
3 Inventories, which had been purchased for 2,000, have been damaged and are
unsaleable. This is not reflected in the financial statements.
4 Fixtures and fittings to the value of 16,000 were delivered just before 31 March
2013, but these assets were not included in the financial statements and the
purchase invoice had not been processed.
5 Wages for Saturday-only staff, amounting to 1,000, have not been paid for the
final Saturday of the year. This is not reflected in the financial statements.
6 Tax is payable at 30 per cent of net profit after tax. Assume that it is payable
shortly after the year-end.
Required:
140
Prepare revised financial statements for Rosemary Limited for the year ended 31
March 2013, incorporating the information in 17 above. Note: Work to the nearest
1,000.
(Adopted from Atril et al (2006) Accounting and Finance for Non-specialist,
Exercise 4.5 page 137-138)
141
UNIT 6: ACCOUNTING FOR CASH FLOW
SCOPE
This unit considers an introduction to cash flow statement.
CHAPTER 8: CASH FLOW STATEMENT

Cash is King. It is relatively easy to manufacture profits but creating cash is
virtually impossible.
(Source: UBS Phillips and Drew-January, 1991-
Accounting for Growth, p.32-quoted in Jones, 2006)

Importance of cash
Cash and the bank accounts
Relationship between cash and profit
Preparation of Cash Flow Statement
Practise Questions
AIM:
To construct a statement of cash flow

State the difference between profit and cash flow.
Outline the need for management to control cash flow
Discuss the importance of cash flow statement
Identify and calculate cash flows from operating activities using both the
indirect and indirect method.
Identify and calculate cash flow from investing activities
Identify and calculate cash flow from financing activities
Prepare cash flow statement
8.1 INTRODUTION
Overview of IAS 7: IAS 7 Statement of Cash Flows requires an entity to present a
statement of cash flows as an integral part of its primary financial statements. Cash
flows are classified and presented into operating activities (either using the 'direct' or
'indirect' method), investing activities or financing activities, with the latter two
categories generally presented on a gross basis. IAS 7 was reissued in December
1992, retitled in September 2007, and is operative for financial statements covering
periods beginning on or after 1 January 1994.
142
ACTIVITY 8.1A: WHY CASH FLOW
Can you think of any reasons why All entities that prepare financial statements in
conformity with IFRSs are required to present a statement of cash flow. [IAS 7.1] as
an integral part of the primary financial statement.
Answer:
Definition of cash flow statement

It is a statement showing from what sources cash has come into the business and
on what the cash has been spent. In preparing a cash flow statement, information
from the current and prior year balance sheet and current year profit and loss
account are used.
Importance of cash flow statement
1. Cash is king. It is essential lubricant of business. Put differently, a business

without cash cannot pay wages, day-to-day running costs, buy stock, and new
fixed assets. This suggests that the generation of cash is key to the survival and
expansion of business. Survival of a business entity depends not so much on
profits as on its ability to pay its debts as when they fall due.
2. The concept of cash is easier to understand than that of profit. The rationale is
twofold. First, cash is objective, whereas profit is subjective. In other words,
accounting profit is odd due to creative accounting, but cash is real stuff. As
Jack Welch, a successful US businessman, notes theres one thing you cant
cheat on and thats cash and Enron didnt have any cash for the last three
years. Second, is used in our daily lives.
3. It is argued that profits does not always give a useful picture of a companys
operations. Users of financial statements might even be misled by a reported
profit figure. For example, if a company makes profit after tax, shareholders
might believe that then this is the amount which it could afford to pay as a
dividend. Unless the company has sufficient cash available to stay in business
and also pay dividend, shareholders expectations would be wrong. Employees
might believe that if a company makes profit, it can afford to pay higher wages
next year. This opinion may not be correct; the ability to pay wages depends
on availability of cash. In short, research shows that a companys performance
and prospects is not dependent on profits earned in a period, but more
realistically on liquidity or cash flow.
Objectives of IAS 7: The objective of IAS 7 is to require the presentation of

information about the historical changes in cash and cash equivalents of an entity by
means of a statement of cash flows, which classifies cash flows during the period
according to operating, investing, and financing activities.
143
Fundamental principle in IAS 7: All entities that prepare financial statements in
conformity with IFRSs are required to present a statement of cash flows [IAS 7.1]. All
entities that prepare financial statements in conformity with IFRSs are required to
present a statement of cash flows. [IAS 7.1]. The statement of cash flows analyses
changes in cash and cash equivalents during a period.
ACTIVITY 8.1A: WHAT IS CASH & CASH EQUIVALENT
What is cash and cash equivalent as per IAS 7?
Answer:
Cash and cash equivalents comprise cash on hand and demand deposits, together with
short-term, highly liquid investments that are readily convertible to a known amount
of cash and that are subject to an insignificant risk of changes in value.
Guidance notes indicate that an investment normally meets the definition of a cash
equivalent when it has a maturity of three months or less from the date of acquisition.
Equity investments are normally excluded, unless they are in substance a cash
equivalent (e.g. preferred shares acquired within three months of their specified
redemption date).
Bank overdrafts which are repayable on demand and which form an integral part of an
entity's cash management are also included as a component of cash and cash
equivalents. [IAS 7.7-8]
8.2 PRESENTATION OF THE STATEMENT

OF CASH FLOWS
Cash flows must be analysed between operating, investing and financing activities. [IAS
7.10]
Key principles specified by IAS 7 for the preparation of a statement of cash flows are as
follows:
1. operating activities are the main revenue-producing activities of the entity that are
not investing or financing activities, so operating cash flows include cash received
from customers and cash paid to suppliers and employees [IAS 7.14]
2. investing activities are the acquisition and disposal of long-term assets and other
investments that are not considered to be cash equivalents [IAS 7.6]
3. financing activities are activities that alter the equity capital and borrowing structure
of the entity [IAS 7.6]. Cash from financing activities include Proceeds from issue of
shares. Proceeds of issue of loans and debentures. Cash outflow may include
repayment of loans and debentures. Calculation of proceeds of issue of shares is
144
derived by comparison of the sum brought forward and the sum carried forward on
two accounts: Share capital and Share premium. Calculation of proceeds of issue of
loans and repayment of loans is also derived by simply subtracting the brought
forward balance from the carried forward.
4. interest and dividends received and paid may be classified as operating, investing, or
financing cash flows, provided that they are classified consistently from period to
period [IAS 7.31]
5. cash flows arising from taxes on income are normally classified as operating, unless
they can be specifically identified with financing or investing activities [IAS 7.35]
6. for operating cash flows, the direct method of presentation is encouraged, but the
indirect method is acceptable [IAS 7.18]
8.2.1 THE DIRECT METHOD

The direct method shows each major class of gross cash receipts and gross cash
payments. The operating cash flows section of the statement of cash flows under the direct
method would appear something like this:
Cash receipts from customers xx,xxx
Cash paid to suppliers xx,xxx
Cash paid to employees xx,xxx
Cash paid for other operating expenses xx,xxx
Interest paid xx,xxx
Income taxes paid xx,xxx
Net cash from operating activities xx,xxx
145
8.2.2 THE INDIRECT METHOD
The indirect method adjusts accrual basis net profit or loss for the effects of non-cash
transactions. The operating cash flows section of the statement of cash flows under the
indirect method would appear something like this:
Profit before interest and income taxes xx,xxx
Add back depreciation xx,xxx
Add back amortisation of goodwill xx,xxx
Increase in receivables xx,xxx
Decrease in inventories xx,xxx
Increase in trade payables xx,xxx
Interest expense xx,xxx
Less Interest accrued but not yet paid xx,xxx
Interest paid xx,xxx
Income taxes paid xx,xxx
Net cash from operating activities xx,xxx
The exchange rate used for translation of transactions denominated in a foreign
currency should be the rate in effect at the date of the cash flows [IAS 7.25]. Cash
flows of foreign subsidiaries should be translated at the exchange rates prevailing
when the cash flows took place [IAS 7.26]. As regards the cash flows of associates
and joint ventures, where the equity method is used, the statement of cash flows
should report only cash flows between the investor and the investee; where
proportionate consolidation is used, the cash flow statement should include the
venturer's share of the cash flows of the investee [IAS 7.37-38]
Aggregate cash flows relating to acquisitions and disposals of subsidiaries and other
business units should be presented separately and classified as investing activities,
with specified additional disclosures. [IAS 7.39] The aggregate cash paid or received
as consideration should be reported net of cash and cash equivalents acquired or
disposed of [IAS 7.42].
Cash flows from investing and financing activities should be reported gross by major
class of cash receipts and major class of cash payments except for the following cases,
which may be reported on a net basis: [IAS 7.22-24].
a. Cash receipts and payments on behalf of customers (for example, receipt and
repayment of demand deposits by banks, and receipts collected on behalf of
and paid over to the owner of a property)
b. Cash receipts and payments for items in which the turnover is quick, the
amounts are large, and the maturities are short, generally less than three
months (for example, charges and collections from credit card customers, and
purchase and sale of investments)
c. cash receipts and payments relating to deposits by financial institutions
d. cash advances and loans made to customers and repayments thereof
146
2. investing and financing transactions which do not require the use of cash should be
excluded from the statement of cash flows, but they should be separately disclosed
elsewhere in the financial statements [IAS 7.43].
3. the components of cash and cash equivalents should be disclosed, and a reconciliation
presented to amounts reported in the statement of financial position [IAS 7.45].
4. the amount of cash and cash equivalents held by the entity that is not available for use
by the group should be disclosed, together with a commentary by management [IAS
7.48].
SOUND BITE 8.2: FORMAT OF CASH FLOW STATEMENT

CASH FLOW FROM OPERATING GH GH
ACTIVITIES
Cash generated from operations**** XXX
Interest paid XXX
Taxation XXX
Net cash flow from operating activities XXX
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of non-current assets XXX
Proceeds from sales of non-current asset XXX
Interest received XXX
Dividend received XXX
Net cash used in investing activities XXX
CASH FLOW FROM FINANCING
ACTIVITIES XXX
Proceeds from issue of shares
Repayment of loans XXX
Net cash used in financing activities XXX
Net increase in cash and cash equivalents XXX
Cash and cash equivalents at the beginning of the XXX
period
Cash and cash equivalents at the end of the period XXX
***Cash flow from operation is presented either using the direct or indirect method discussed
above. RECAP: The direct method requires cash inflows from operating activities (e.g. cash
sales and cash received from debtors), less cash outflow from operating activities (e.g. Cash
purchases, Cash paid to creditors, Cash expenses). The indirect reconciles between profit
before tax (as reported in the profit and loss account) and cash generated from operations.
8.2.3 CALCULATION OF INTEREST/DIVIDEND/TAX

PAID:
Calculation of interest / dividend/tax paid: The cash flow should be calculated by reference
to:
147
The charge to profits for the item (shown in the profit and loss account)
Any opening or closing balance shown on the balance sheet.
The rule of thumb is:
Start with arrears at the beginning of the accounting period
Add profit and loss charge of the period
Less arrears at end of accounting period
The difference is tax paid or dividend paid or interest paid as the case may be.
8.2.4 CALCULATION OF INTEREST/DIVIDEND/TAX

RECIEVED
Calculation of interest /dividend received: The cash flow should be calculated by reference
to both the income receivable shown in the profit and loss account and any relevant
receivables balance from the opening and closing balance sheet.
The rule of thumb is:

Start with receivables at the beginning of the accounting period
Add profit and loss receivables of the period
Less receivables at end of accounting period
The difference is interest or dividend received as the case may be.
8.2.5 PURCHASE, PROCEEDS AND PROFIT/LOSS ON

DISPOSAL OF NON-CURRENT ASSETS
Calculation of purchase, proceed and profit or loss on disposal of non-current assets:
The following account will be required for each class of assets:
Non-current asset account
Accumulated depreciation account
Disposal account ( where relevant)
Data provided in the financial statement should then be entered into these T accounts and
the required cash flow found (often the balancing figures).
In some cases, insufficient detail is provided to produce separate cost and accumulated
depreciation accounts. Instead, a net book value account should be used. The format may
vary from question to question but the substance remains unchanged. Refer to the chapter
on accounting for non-current assets for guidance.
148
8.3 WORKED EXAMPLE
Darlene Limiteds income statement for the year ended 31st December 2013 and balance sheet
at 31st December 2012 and 2013 were as follows:
Darlene Limited.
Income Statement for the year ended 31st December 2013
GH GH
Sales 720
Raw material consumed 70
Staff costs 94
Depreciation 118
Loss on disposal of fixed asset 18 300
Operating profit 420
Interest payable 28
Profit before tax 392
Taxation 124
268
Dividend 72
Profit retained for the year 196
Balance brought forward 490
686
Darlene Limited
Statement of financial position as at 31st December
2013 2012
GH GH GH GH
Assets
Fixed assets
Cost 1,596 1,560
Depreciation 318 1,278 224 1,336
Current assets
Stock 24 20
Trade debtors 76 58
Bank 48 148 56 134
1,426 1,470
Equity and Liabilities
Capital and reserves

Share capital 360 340
Share premium 36 24
Retained earnings 686 1,082 490 854
149
Long term liabilities
Loan 200 500
Current liabilities
Trade creditors 12 6
Taxation 102 86
Proposed dividend 30 24
144 116
1,426 1,470
During the period the company paid GH90 for a new machinery.
Required Prepare the cash flow statement.

Solution
150
Step 1:Set out the proforma cash flow statement with the headings required. Use three sheets
or more sheets of paper, one for the main statement, one for notes and one your workings.
Step 2:Begin with reconciliation of operating profit to net cash from operating activities as
far as possible. When preparing the statement from the balance sheets, you will have to
calculate such items as depreciation, loss on sale of fixed assets, profit for the year and
taxation. Note that you may not be given the tax charge in the profit and loss accounts. You
will then have to assume that the tax paid in the year is last years provision and calculate the
charge as balancing figure.
Step 3:Calculate the cash flow figures for dividend paid, purchase or sales of fixed asset,
issue of shares and repayment of loans if these are not readily given to you.
Step 4:If you are not given the profit figure, open up a working for the trading, profit and loss
account. Using the opening and closing balances, the taxation charge and dividends paid and
proposed, you will be able to calculate profit for the year as the balancing figure to put in the
net profit to net cash flow from operating activities section.
Step 5:You will now be able to complete the statement by slotting in the figures given or
calculated.
Benefits of cash flow statement
It provides additional information on business activities.
Assess the current liquidity of the business.
Allow the user to see the major types of cash flow into and out of the business.
It is use to estimate future cash flows.
Determine cash flows generated from trading transactions rather than other cash
flows.
Drawbacks of cash flow statement

The cash flow statement is a backward looking. Users of the accounts are particularly
interested in the future.
No interpretation of the cash flow statement is provided within the accounts Users are
required to draw their own conclusion as to the relevance of the figures contain within
it.
Darlene Limited
Cash flow statement for the year ended 31st December 2013
151
GH GH
Net cash flow from operating activities
Operating profit 420
Depreciation 118
Loss on sale of fixed asset 18
Increase in stock (4)
Increase in debtors (18)
Increase in creditors 6
Cash generated from operations 540
Interest paid (28)
Dividend paid (W 1) (66)
Tax paid (W 2) (108)
Net cash flow from operating activities 338
Cash flow from investing activities

Purchase of fixed assets (90)
Proceeds from sale of fixed asset (W 5) 12
Net cash flow from investing activities (78)
Cash flow from financing activities
Issue of shares (W 6) 20 +12 32

Long term loan paid (W 7) (300)
Net cash flow from financing activities (268)
Decrease in cash and cash equivalents (8)
Cash and cash equivalents at 1st January 2013 56
Cash and cash equivalents at 31st December 2013 48
Working 1
152
Interest payable
GH GH
Balance b/f 24
Cash paid 66 Profit and loss account 72
(Charge for the year)
Balance c/f 30
96 96
Working 2
Taxation
GH GH
Balance b/f 86
Cash paid 108 Profit and loss account 124
Balance c/f 102
210 210
Working 3
Fixed asset account
GH GH
Bal b/f 1,560

Purchases (Cash) 90 Disposal 54
Bal c/f 1,596

1,650 1,650
Working 4
Accumulated Depreciation
GH GH
Balance b/f 224
Disposal 24 Profit and loss account 118
Balance c/f 318
342 342
Working 5
153
Disposal account
GH GH
Fixed asset 54 Accumulated Depreciation 24
Profit and loss account 18
00 Cash proceeds 12
54 54
Working 6
Shares account
GH GH
Balance b/f 340
Proceeds from issue of shares 20
Balance c/f 360
360 360
Working 6
Share premium account
GH GH
Balance b/f 24
Cash 12
Balance c/f 36
36 36
Working 7
Loan account
GH GH
Balance b/f 500
Loan paid 300
Balance c/f 200
500 500
154
Q1. Prepare cash flow statements for 2012 for J.W. Monica Supplies Limited using the
indirect method from the data below.
Income statement 2012

GH
Revenue 100,000
Gross profit 50,000
Operating expenses (36,000)
Profit for the year 14,000
Balance Sheets 2012 2011

GH GH
Non-current assets at cost 25,000 14,000
Accumulated depreciation (11,000) (7,000)
14,000 7,000
Current assets
Inventories 34,000 25,000
Trade receivables 25,000 29,000
Cash 15,000 10,000
74,000 64,000
Current liabilities
Trade payables (24,000) (21,000)
NET ASSETS 64,000 50,000
Equity
Share capital 20,000 20,000
Retained profit 44,000 30,000
TOTAL EQUITY 64,000 50,000
Notes: i) There were no disposals of fixed assets during the year.

ii) Operating expenses include a depreciation charge of GH 4,000.
155
Q2. The balance sheet of ABCD Limited at the end of 2012 is shown in the table below:
000
Non-current assets Nil
Current assets
Inventories 500
Trade receivables 900
Cash 600
2,000
Current liabilities
Trade payables (700)
NET ASSETS 1,300
Equity
Share capital 500
Retained profit 800
TOTAL EQUITY 1,300
During 2013 the company:
1) Sold goods on credit amounting to 5,700,000. During the year the company collected
the opening trade receivables but at the end of the year, its customers still owed
1,100,000.
2) Purchased goods for resale on credit totalling 4,800,000. At the end of 2013,
900,000 were not paid for although the company had settled the trade payables
brought forward at the start the year. Goods remaining in inventory at the end of 2013
amount to 550,000.
3) Overhead expenses of 800,000, which were all paid for by the year end.
4) A non-current asset was received on the last day of the year, which cost 500,000 and
had
been paid for a month in advance.
REQUIRED
Prepare a balance sheet for the 2013 year end, together with an income statement and
a cash flow statement for the 2013 financial year.
156
9.0 ASSIGNMENTS
Present (submit on lore) these assignments before the start of each meeting
MEETING 1: The accounting equation and financial statements

Attempt both questions in advance
1. Published accounts
Select a Ghanaian quoted company (a PLC public limited company) that you know
something about and obtain their most recent annual report. You can work with one or two
friends for this if you wish. Most companies provide their annual reports and accounts on
their web site or Africa financials. If you are stuck for ideas, use a healthcare, oil and Gas,
manufacturing or industrial company, although I would recommend at this stage that you do
not choose a bank, due to different reporting requirements.
From these accounts:

a) Roughly what proportion of the annual report is devoted to the accounts? What
else does it include and what do you think are the most significant elements?
b) Identify the period for which the accounts are prepared (usually a year; the exact
year-end date should be in the Directors Report and the audit report and is
probably given in various other places. How much time has elapsed between that
date and now? What are the implications for users of these accounts?
c) Summarise the balance sheet of your chosen company as an accounting equation
and research the meaning of any elements that you do not understand.
2. Maame Nyarko & Co Limited
a) Compile a balance sheet for Maame Nyarko & Co Ltd from the following
information:
GH000
Cash at bank and in hand 4
Plant and equipment (at net book value) 262
Retained profits 181
Long term loan - 10% Debentures 104
Accounts Receivable (Debtors) 36
10p Ordinary Shares 200
Accounts Payable (Creditors) 32
Corporation tax payable 68
Property (Land and buildings) 194
Dividends payable 8
Registered patent 1
Inventory (Stock and work in progress) 96
b) Having prepared the balance sheet comment on the following two statements:
i) "The company is in a strong position to expand; it has large reserves which it

can use to invest in current and non-current assets".
157
ii) "Given the size of the company's reserves, the dividends payable for the year
are far too low".
MEETING 2: Recording and reporting transactions
Attempt this question in advance
Bentwood Antiques
R. Bentwood opened an antique shop trading as Bentwood Antiques on 1st January, investing
5,000 of his savings in the venture. The following transactions occurred during his first
months trading:
1) Purchased antiques for re-sale on account (i.e. on credit) from another dealer at a
total cost of GH2,000.
2) Paid GH600 cash for rent of shop which covers the period from 1st January to end
of June.
3) Paid GH250 cash for the redecoration of the shop.
4) Sold antiques (from amongst those purchased in transaction a) above) for 2,000
cash, which had cost him GH1,400.
5) Paid his part-time assistant a salary of GH150 in cash.
6) Purchased antiques at an auction (for resale) which cost GH600 and paid for them
in cash.
7) Sold antiques for GH480 on credit which had cost GH300.
Required:
a) Record the book-keeping entries for these transactions in spreadsheet/matrix format.

(A blank matrix is included on the next page, but you will need to decide which
accounts are required i.e. how many columns and what to call them. The Owners
Capital and Cash are given to start you off.)
b) Prepare a summary of cash flows and an income statement (profit and loss account)
for the month of January, and a balance sheet as at the month-end.
Prepare ledger accounts for these transactions. (Use the three column ruling) (There are some
blank accounts included with this pack, but again you need to decide which accounts are
needed, though Owners Capital and Cash are again given to start you off.)
158
MEETING 3: ACCOUNTS PREPARATION
Attempt both questions in advance
1. F. Wood & Co. (Trading) Limited
F. Wood & Co. (Trading) Limited makes up accounts to 31 December each year. A provision
for doubtful debts is carried at 3% of the outstanding balances and at 31 December 2010 the
provision stood at 1,000. The debtors ledger balances at 31 December 2010 totalled 52,000
and included 2,000 owed by A. Stranger Ltd, a company which has been declared bankrupt.
The liquidator has advised F. Wood & Co. (Trading) Ltd that creditors can expect payment of
25pesewas.
Required:
a) Explain the difference between bad debts and a provision for doubtful debts.
b) State and explain the accounting measurement principle (convention) which is

being applied in making a provision for doubtful debts.
c) Show the accounting entries required to reflect the above information in the 2010
accounts of F. Wood & Co. (Trading) Limited, including the relevant extracts
from the Income Statement (Profit and Loss Account) and Balance Sheet.
d) What would be the effect if, in June 2011, the company received 600 from the
liquidators of A. Stranger Ltd, in full and final settlement of the outstanding debt?
(Adapted from: Wood, F & Robinson, S (2004) Frank Woods Book-keeping and Accounts,
London, FT/Prentice Hall, Exercises 27.5X (NEAB GCSE) and 27.6X)
159
MEETING 4: NON-CURRENT ASSETS
Ms Illia and Ms Electra: business competitors
On 1st January, Ms Illia set up a business called Illia Fit-Start, and Ms Electra set up a
business called Electra Get-Fit. Both businesses were developing and retailing fitness
products. During the following year, they undertook identical transactions, as follows:
(f) Purchased equipment on 1st January for 100,000. The equipment has an
estimated useful life of 5 years, after which it will have an estimated residual
value of 10,000.
(g) Incurred research and development expenditure of 50,000.
(h) Purchased inventory (stock) as follows:

1 January 2,000 units at 50 each
1 May 2,000 units at 100 each.
(i) Made sales of the above items as follows:

30 September 2,000 units at 150 each.
(j) Paid overheads and expenses of 50,000.
The accounting policies adopted by the two businesses are as follows:
Illia Fit-Start Electra Get-Fit

Depreciation Straight line Reducing balance
(Rate approximates to
37%)
Research and development Amortised over 10 years Written off as incurred
Stock valuation FIFO LIFO
Required:
iii) Prepare income statements (profit & loss accounts) for Illia Fit-start and Electra Get-
fit for their first year of trading.
iv) Comment on the statements you have prepared and discuss the effects of the
differences in accounting treatment on the balance sheets of the two businesses.
160
MEETING 5: ACCOUNTING FOR LIMITED LIABILITY COMPANY
Agana Ltd
2. The balances shown below were extracted from the books of Agana Ltd at 31 December
2010.

Ordinary shares of 1 fully paid 50,000
Purchases 220,000
Retained profit 30,000
Freehold property cost 100,000
Freehold property accumulated depreciation 20,000
Fixtures cost 15,000
Fixtures accumulated depreciation 9,000
Rates 3,000
Motor vehicles cost 28,000
Motor vehicles accumulated depreciation 14,000
Insurance 2,000
Inventory (stock) at 1 January 2010 40,000
Accounts receivable (Debtors) 30,000
Accounts payable (Trade creditors) 24,000
Revenue (Sales) 310,000
Cash at bank 12,100
Long term loan - 12% Debentures 40,000
Debenture interest 2,400
Wages and salaries 34,000
Heating and lighting 4,100
Professional fees 3,900
General expenses 3,200
Provision for doubtful debts 1,000
Bad debts written off 300
The following information is also relevant:
a) Depreciation has not yet been provided for the year. The following rates apply on a
straight line basis, with an assumption of zero residual value:
Property (Land and buildings) 5%
Fixtures and fittings 10%
Motor vehicles 20%
b) Inventory (stock) at 31 December 2010 amounted to 45,000
161
c) i) Rates paid include an invoice for 800 relating to the period 1 December 2010 to
31 January 2011
ii) An electricity bill covering the quarter to 31 December 2010 and amounting to
320 was not received until February 2011.
iii) It is estimated that the audit fee for 2010 will be 1,500.
d) A general provision for doubtful debts of 4% is to be carried forward.
e) You note that some debenture interest is owing and has not been entered in to the
books, and that the Directors propose a dividend of 20pesewas per ordinary share.
Required: Prepare an income statement (profit and loss account) and balance sheet for Agana
Ltd for the year ended 31 December 2010.
MEETING 5: Cash flow statements
MIREKU HOLIDAYS PLC
Balance sheets 2012 2011

000 000 000 000
Non-current assets:
Intangible assets -
Research and development at 30 10
NBV
Tangible assets -
Property at valuation 46 30
Plant and equipment at cost 80 70
- less accumulated 40 40 30 40
depreciation
116 80
Current assets
Inventory 16 20
Accounts receivable 20 15
Cash 4 5
40 40
Current liabilities
Trade and other payables (29) (19)
Non-current liabilities
Debenture loans (49) (35)
Total net assets 78 66
162
Equity:
Ordinary share capital 60 50
Retained earnings 18 16
78 66
Additional information:
1. The company capitalises allowable research and development expenditure as intangible

non-current assets and amortises these items over their useful lives. The total
amortisation charge for 2012 was 4,000.
2. The company carries its property at valuation. There were no sales of property during the
year and no adjustment to valuation was required.
3. Included in plant and equipment at the end of 2010 were some items which were sold
during 2011 for 6,000. They had originally cost 30,000 and their net book value at the
time of sale was 12,000.
1. An issue of debentures was made during 2011 and none were redeemed during the year.
Interest paid during the year amounted to 4,000 and there were no amounts outstanding
at the year end.
2. No taxation was paid or payable.
3. A dividend of 10,000 was paid during the year.
Required:
a) Prepare a cash flow statement in accordance with IFRS7.
b) Use the statement you have prepared and relevant ratios to comment on the companys
cash management during the year.
163

Basic Accounting and Financial Management

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Basic Accounting and Financial Management

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BASIC ACCOUNTING AND FINANCIAL MANAGEMENT

Previously, K.O. lectured at the University of Ghana Business School on the

K.O is also a member of both the Association of Certified Chartered Accountants

I wish to acknowledge a number of individuals whom I owe a debt of a significant magnitude,

Second, people who have made my life comfortable

SCOPE: This chapter considers the following:

INTENDED LEARNING OBJECTIVES

FIGURE 1: ACCOUNTING INFORMATION SYSTEM

(Source: Frank Woode and Sheila Robinson, 2013)

In addition, the definition identifies the need for accounting information to be

ACTIVITY 1.0 THE ACCOUNTING CYCLE

8. CLOSING 1. TRANSACTION OCCURS

Transaction occurs (source documents)

1.1 WHO ARE THE USERS OF

To conserve space we discuss point 1 and 2.

1. Identify both internal and external users

FIGURE 2: Accounting information Users

2. Evaluate user information needs

ACTIVITY 1.1: USER OF ACCOUNTING REPORTING

ACTIVITY 1.2: CONFLICTING INTERESTS OF USER GROUP

1.2 BRANCHES OF ACCOUNTING

FIGURE 3: Branches of Accounting

Table 2 Financial and Management Accounting

1.3 WHAT IS THE PURPOSE OF

satisfy demand of company law requirement and listing regulation

In summary, the purpose of accounting is to provide useful information to assist managers in

FIGURE 3: THE QUALITIES THAT INFLUENCE THE USEFULNESS OF

1.4 QUALITATIVE CHARACTERISTICS OF

SOUNDBITE 1.4: MATERIALITY THRESHOLD

ACTIVITY 1.4: COST VS BENEFITS

1.5.1 Statement of financial position

1.5.2 Statement of Comprehensive Income

1.5.3 Statement of Cash Flow

1.5.4 Statement of Changes in Equity

1.5.6 Notes to accounting policies and other explanatory

1.6 DESCRIPTION OF ELEMENTS IN THE

(Source: Mclaney and Atril, 2012)

1.6.7 Operating Activities

1.6.8 Investment Activities

1.6.9 Financing Activities

1.6.10 Recognition of Elements of financial Statement

1.7 ACCOUNTING POSTULATES

1.7.1 Accrual basis of accounting

1.7.2 Going Concern

1.7.4 Prudence Concept

ACTIVITY1.7: DETERMINANTS OF A USEFUL INFORMATION

ACTIVITY 1.8: CONFLICTING STANDARDS

ACTIVITY 1.9: ARE THESE ASSETS?

ACTIVITY 1.10: ARE THESE LIABILITIES?

Remember: Liabilities are obligations to transfer economic benefit

1.9 BASIC ACCOUNTING

1.9.1 Objectivity (independent valuation)

1.9.2 Substance over form

1.9.5 Money measurement

1.9.6 Historical cost

1.9.7 Dual aspect

1.9.8 Stability of Money

2. USEFULNESS - Information should be useful to those readers to whom it is directed.

3. MATERIALITY - significance of transactions and assets to the accounts (overrides

Other conventions are:

ACTIVITY 1.9: DUALITY

ACTIVITY 1.10: RECOGNITION AND DISCLOSURE

1.10 LIMITATIONS OF FINANCIAL